Peg Abandonment and Cross-Currency Contagion

25 Pages Posted: 28 Mar 2022

See all articles by Florian Balke

Florian Balke

Goethe University Frankfurt - Department of Finance

Andreas Barth

Goethe University Frankfurt - Department of Finance

Arne Reichel

Goethe University Frankfurt - Department of Finance

Mark Wahrenburg

Faculty of Economics and Business Administration

Date Written: February 25, 2022

Abstract

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

Balke, Florian and Barth, Andreas and Reichel, Arne and Wahrenburg, Mark, Peg Abandonment and Cross-Currency Contagion (February 25, 2022). Available at SSRN: https://ssrn.com/abstract=4043569 or http://dx.doi.org/10.2139/ssrn.4043569

Florian Balke

Goethe University Frankfurt - Department of Finance ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt, DE 60629
Germany

Andreas Barth

Goethe University Frankfurt - Department of Finance ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt, 60629
Germany

Arne Reichel (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

Mertonstr. 17
Frankfurt, 60054
Germany
00496979833717 (Phone)

Mark Wahrenburg

Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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