The safe haven status of the Swiss franc Can the Swiss franc still be considered a safe haven currency after the announcements by the Swiss National Bank to adjust its monetary policy? Bachelor thesis Economics and Finance, 12 EC Author: Vivienne GroeneweGen UvAnetID: 11034963 Supervisor: ms. Rui Zhuo June 26, 2018 Abstract This paper examines whether the safe haven status of the Swiss franc has altered after a chanGe in monetary policy announced by the Swiss National Bank (SNB) on 03-2009. An empirical analysis usinG an OLS regression follows, where the variables used to describe the safe haven status are S&P500, Treasury notes and market risk. A VIF test is analyses multicollinearity. Two time periods are compared to each other, namely the period prior and sequent the SNB’s announcement. Besides the regression, fundamentals of a safe haven currency have been considered. The findings of this thesis are ambiGuous. Statement of originality This document is written by Student Vivienne Groenewegen who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document are oriGinal and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents. 2 Table of Contents 1. Introduction .................................................................................................................... 4 2. Literature review .......................................................................................................... 5 2.1 Safe haven ................................................................................................................................................. 5 2.2 Risk .............................................................................................................................................................. 6 2.3 Risk hedging and the Uncovered Interest Parity ..................................................................... 7 2.4 Currency appreciation ........................................................................................................................ 8 3. Methodology and data ................................................................................................. 9 3.1 Methodology ............................................................................................................................................ 9 3.2 Assumptions .......................................................................................................................................... 10 3.3 Hypothesis .............................................................................................................................................. 12 3.4 Data ........................................................................................................................................................... 13 4. Results and empirical data analysis .................................................................... 13 5. Discussion ..................................................................................................................... 18 6. Conclusion .................................................................................................................... 19 Reference list .................................................................................................................... 20 Appendix ............................................................................................................................ 22 3 1. Introduction AccordinG to Nelson and Katzenstein, we live in a world with constant risk and uncertainty and the global financial crisis starting in 2007 reminded us of this once again (2014). Due to the crisis, people became more risk averse (Barrios, Iversen, 2009). They are seekinG for less risky investments and a ‘strong’ currency. The financial crisis is not the only period in which signs are shown of increased risk aversion. For example, the attack on the twin towers at 9/11 was another event in which financial uncertainty increased. This event led people to search for a safe currency to invest their money in. One of these currencies was the Swiss franc. In fiGure 1, a remarkable appreciation of the Swiss franc within an hour of the first plane crash can be observed. The appreciation is exceeding the appreciation of other currencies. The reason for this strong appreciation of the Swiss franc is its safe haven status (e.g. Botman, Carvalho Filho, & Waikei, 2013 and Ranaldo and Söderlind, 2010). Already from WWI onwards, the Swiss currency shows signs of an increasing exchange rate (Latsos & Schnabl, 2008). Andréa M. Maechler, a member of the governing board of the Swiss National Bank (SNB), explained in a speech in November 2017 that the rapid appreciation of the Swiss franc due to the financial crisis had created a risk for the Swiss franc of deflating. This was due to the drop in price level. In her speech she told that the SNB therefore wants to prevent the Swiss franc from any further appreciation. To do so, the SNB announced and started as of March 2009 to buy foreiGn currency in order to decrease the demand for Swiss francs. Tachibana writes in his paper published in 2018 that the Swiss franc is still one of the biggest hedging currencies (2018). However, the SNB did adjust its monetary policy sharply as of 2009. This raises the following research question: Can the Swiss franc still be considered a safe haven currency after the announcements by the Swiss National Bank to adjust its monetary policy? Kaul and Sapp show that the U.S dollar used to be a safe haven during the millennium time, but that it no longer is (2006). This confirms that the status of safe haven currency can be altered. To find an answer to the research question, an empirical research is performed. This research makes use of a time series reGression. Also the fundamentals of a safe haven are reviewed. The main finding of this paper is that the results are ambiGuous. It does not become clear from this research what the current status of the Swiss franc is. 4 This paper is structured as follows. It starts with a literature review in section 2, followed by a methodoloGy in section 3. Section 4 provides the results. Based on these results, section 5 will provide a discussion. The paper ends with a conclusion in section 6. FIGURE 1: 9/11 exchanGe rate appreciations. In the hours prior to the attack, the Swiss Franc (CHF) had an exchange rate against the U.S. equal the Euro (EUR) and the British Pound (GBP). In the hours after the attack, CHF appreciated significantly, exceeding the exchange rates of the Euro, British Pound and Japanese Yen. Source: Ranaldo & Söderlind, 2010. 2. Literature review 2.1 Safe haven A safe haven asset is defined as an asset that provides a hedGe aGainst risk (Ranaldo and Söderlind, 2010). Its term oriGinates from times of stormy weather on sea, where boats and ships had to flee to a harbour to take shelter of the storm. A safe haven asset therefore is an asset that holds its value in times of bad weather (Baur, & Mcdermott, 2010). In the context of this paper, it is an asset that does not lose value in times of increased financial risk. Therefore, the demand for safe haven currencies increases in risky times, as investors are assumed to be risk averse. Ronaldo and Söderlind explain that in times of financial uncertainty and increased exposure to market risk, a safe haven currency will appreciate (2012). Safe haven assets include hard assets, of which the most well-known example is Gold. DurinG the financial crisis, the price for gold increased by 42% (Baur, & Mcdermott, 2010). Besides hard assets, currencies can be safe haven assets. There have been many studies performed on the safe status of the 5 Japanese currency the yen. The Japanese yen is sometimes referred to as a safe haven, however not as convincing as the Swiss francs’ safe haven status. The reason for this trust in the Swiss currency is amonGst others their stable Government and financial system (ZurbrüGG, 2012). Campbell, Serfaty-de Medeiros and Viceira explain that the Swiss franc is neGatively correlated to market returns, both the international and their domestic stock returns (2009). Currencies not known as safe haven currencies are positively related to market returns. The Australian dollar and the Canadian dollar are examples of non-safe haven currencies and Campbell, Serfaty-de Medeiros and Viceira find that these two currencies are indeed positively related to market returns (2009). Habib and Stracca test three fundamentals of a country for beinG a safe haven currency. First of all, the country should be safe and have a low interest rate (2012). The safe status of a country, althouGh this is a broad term, will attract investment in times of increased risk aversion. The low interest rate reflects the absence of risk. The second explanation by Habib and Stracca is that size and liquidity of financial markets matter (2012). DurinG financial stress and increased risk aversion, the chances of a liquidity crisis to occur increase. Therefore, increased liquidity represents more safety. The third explanation Habib and Stracca test is the openness of a country towards Global investments. They find that financially open countries are more sensitive for global turbulence. Safe haven countries should therefore be