Firm-level effects of asymmetric intervention in foreign exchange markets: Evidence from the Swiss currency floor

• Published in: Journal of international money and finance Vol. 60; pp. 289 - 312
• Main Author: Streit, Daniel
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier Ltd 01.02.2016; Elsevier Science Ltd
• Subjects: Central bank intervention; Central banks; Currency floor; Euro; Exchange rates; Foreign exchange markets; Foreign exchange rate risk; Foreign exchange rates; Market risk; Monetary policy; Rates of return; Studies; Swiss franc; Switzerland; Volatility; Switzerland; Foreign exchange rate risk; Swiss franc; F31; G30; Market risk; F03; E58; Central bank intervention; F04; Euro; Currency floor
• ISSN: 0261-5606; 1873-0639
• DOI: 10.1016/j.jimonfin.2015.09.002

•Analyzes the Swiss currency floor as an asymmetric type of policy unique in history.•Applies and extends established methodology to study firm-level policy effects.•Finds significant decreases in firms' market betas during policy enforcement.•Documents asymmetric effects on residual EUR/CHF exchange rate risk exposures.•Exporting firms benefit in disproportion by the policy compared to importing firms. In January 2015, the Swiss National Bank (SNB) abandoned the Swiss franc's exchange rate floor against the Euro. This paper is the first to study the firm-level effects of this asymmetric type of central bank intervention in foreign exchange markets. Using weekly stock returns for a sample of Swiss non-financial firms, I find significant reductions in total stock return volatility as well as market risk following the introduction of the currency floor. Accounting for the asymmetric nature of the intervention, I show that the enforcement of this policy solely manifests in a significant reduction of incremental EUR/CHF exchange rate risk exposures of exporting firms, while importing firms experience reductions in proportion to the market portfolio only. Thus, the asymmetric policy design is reflected in asymmetric responses of firm-level currency exposures. All effects, however, do not depend on the extent of business activity in the Eurozone. The overall results suggest that the currency floor was successful in supporting the performance of the Swiss economy by effectively reducing stock return sensitivities to market fluctuations and EUR/CHF exchange rate volatility.