An empirical analysis of the uncovered interest parity for the Swiss franc/US dollar exchange rate.

Abstract

The scope of this study is to examine the uncovered interest parity (UIP) for the Swiss franc-US dollar (CHF/USD) exchange rate during the period 1994 -2012. The UIP hypothesis relates the expected exchange rate change to interest rate differential. It should be taken in to account that the Swiss franc is considered a safe haven currency and hence additional particularities are affecting any relationship seeking to explain exchange rate movements. As per RANALDO and SÖDERLIND (2007) the Swiss franc, the yen, and to a limited extent also the euro display safe haven characteristics while the dollar and the pound show no such behavior. In periods of low risk aversion, are usually associated with an appreciation of the US dollar and periods of high risk aversion with a depreciation of the dollar against the yen and the Swiss franc. Similarly, Cairns et al (2007) find that the franc, the euro and to some degree, the yen tend to strengthen against the dollar when volatility rises. However, Cairns et al (2007) also find that the US dollar tends to appreciate during these periods against a number of other currencies, especially those from emerging markets, making it a safe haven relative to them. It seems that a safe haven currency is likely to be buffeted mainly by global factors in times of worldwide turbulence (Hoffmann M. & Suter R., 2009).