How do Retail Investors Adapt to Exchange Rate Shocks?

62 Pages Posted: 12 Dec 2024 Last revised: 13 Jan 2025

See all articles by Martin Brown

Martin Brown

Swiss National Bank - Study Center Gerzensee; University of St. Gallen

Daniel Hoechle

FHNW School of Business - Institute for Finance; University of Basel - Department of Finance

Alejandra Perez

affiliation not provided to SSRN

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

Date Written: December 10, 2024

Abstract

We study the impact of monetary policy on household finance in open economies. We examine the response of retail investors to a policy shock which led to (i) a sharp appreciation of the domestic currency, (ii) a significant increase in exchange rate volatility, and (iii) the introduction of a negative policy rate. Our analysis is based on monthly, account-level data covering bank deposits, securities holdings and trades for a large sample of affluent bank clients. The policy shock leads to a shift of assets away from fixed income securities towards domestic currency bank deposits and foreign currency risky securities. Wealthier clients display a stronger portfolio shift towards risky securities in foreign currency as they search for yield. Investor attention, as measured by trading activity and contacts with bank advisors, increases temporarily after the shock.

Keywords: Household finance, Monetary policy, Financial stability, Exchange rates, Interest rates

JEL Classification: E41, E52, E58, F31, G11, G21, G51

Suggested Citation

Brown, Martin and Hoechle, Daniel and Perez, Alejandra and Schmid, Markus, How do Retail Investors Adapt to Exchange Rate Shocks? (December 10, 2024). Swiss Finance Institute Research Paper No. 108, Available at SSRN: https://ssrn.com/abstract=5053211 or http://dx.doi.org/10.2139/ssrn.5053211

Martin Brown

Swiss National Bank - Study Center Gerzensee ( email )

Zuerich, 8022
Switzerland

University of St. Gallen ( email )

Unterer Graben 21
St. Gallen, CH-9000
Switzerland

Daniel Hoechle

FHNW School of Business - Institute for Finance ( email )

Peter Merian-Strasse 86
Basel, CH-4002
Switzerland
+41 61 279 17 73 (Phone)

University of Basel - Department of Finance ( email )

Peter Merian-Weg 6
Basel, CH-4002
Switzerland

Alejandra Perez

affiliation not provided to SSRN

Markus Schmid (Contact Author)

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Unterer Graben 21
St. Gallen, 9000
Switzerland

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Swiss Finance Institute

c/o University of St. Gallen
Dufourstrassse 50
St. Gallen, SG 9000
Switzerland

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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