Peg Abandonment and Cross-Currency Contagion
25 Pages Posted: 28 Mar 2022
Date Written: February 25, 2022
Using a novel dataset of dealer-specific bid-ask quotes for foreign exchange swaps, we document that the Swiss franc decoupling event in 2015 spilled over to other pegged currencies. The SNB decision served as a wake-up call for dealer banks who started to price the risk of unexpected peg abandonments and widen bid ask spreads for pegged currencies. Our results suggest that, even for strong currencies, the credibility and effectiveness of a currency peg does not solely depend on the actions of the respective central bank, but also on the stability of other currency pegs.
Keywords: fixed exchange rate regime, FX swaps, reverse speculative attacks
JEL Classification: F33, G14, G15, G2
Suggested Citation: Suggested Citation