The Discontinuation of the EUR/CHF Minimum Exchange Rate in January 2015: Was It Expected?

42 Pages Posted: 13 Jul 2017

See all articles by Michael Funke

Michael Funke

University of Hamburg - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Julius Loermann

University of Hamburg - Department of Economics

Richhild Moessner

Bank for International Settlements (BIS)

Date Written: July 2017

Abstract

We derive risk-neutral probability densities for future euro/Swiss franc exchange rates as implied by option prices. We find that the credibility of the Swiss franc floor somewhat decreased as the spot exchange rate approached the lower bound of 1.20 CHF per euro. We also compare the forecasting performance of a random walk benchmark model with an error-correction model (ECM) augmented with option-implied break probabilities of breaching the currency floor. We find some evidence that the augmented ECM has an informational advantage over the random walk when using one-month break probabilities. But we find that one-month option-implied densities cannot predict the entire range of exchange rate realizations.

Keywords: Swiss franc, forecasting, options, risk-neutral probability densities

JEL Classification: C53, F31, F37

Suggested Citation

Funke, Michael and Loermann, Julius and Moessner, Richhild, The Discontinuation of the EUR/CHF Minimum Exchange Rate in January 2015: Was It Expected? (July 2017). BIS Working Paper No. 652. Available at SSRN: https://ssrn.com/abstract=3001808

Michael Funke (Contact Author)

University of Hamburg - Department of Economics ( email )

Von-Melle-Park 5
room 2128 C rise
Hamburg, 20146
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Julius Loermann

University of Hamburg - Department of Economics ( email )

Von-Melle-Park 5
room 2128 C rise
Hamburg, 20146
Germany

Richhild Moessner

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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