The CHF/EUR Exchange Rate during the Swiss National Bank’s Minimum Exchange Rate Policy: A Latent Likelihood Approach
Quantitative Finance, 2018, 19(1), 1-11
35 Pages Posted: 27 Oct 2014 Last revised: 31 Dec 2018
Date Written: June 23, 2017
Between September 6, 2011, and January 15, 2015, the Swiss National Bank (SNB) enforced a lower bound of 1.20 on the CHF/EUR exchange rate. In this paper, we view the SNB's commitment to this lower bound as a put option and use a latent likelihood estimation approach to infer (a) where the exchange rate would have been without this policy (the latent exchange rate), (b) the volatility of the latent exchange rate, and (c) the market's view on the expected remaining lifetime of the SNB's policy. Our model shows that the removal of the policy was preceded by a sharp decline in the market's estimate of its expected remaining lifetime, although the market was unable to anticipate the exact timing of the removal. The model accurately predicts the CHF/EUR rate following the removal.
Keywords: Swiss franc; Latent exchange rate; Currency options; Latent likelihood approach
JEL Classification: G13, F31, E58
Suggested Citation: Suggested Citation