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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | The Reaction of Stock Markets to the Swiss National Bank Communication on the Euro Franc Peg |
| Organization Unit | |
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| Language |
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| Institution | University of Zurich |
| Faculty | Faculty of Economics, Business Administration and Information Technology |
| Number of Pages | 120 |
| Date | 2015 |
| Abstract Text | On September 6, 2011 the Swiss National Bank (SNB) adopted a minimum exchange rate of 1.20 Swiss francs per euro. This unconventional measure was aimed to ease a massive overvaluation of the Swiss franc caused at that time by an intensifying debt crisis in the euro area. The SNB set this exchange rate peg as an additional operational target of its monetary policy and promised to do ”whatever it takes” to ensure that the euro Swiss franc exchange rate would not fall below this level. During the next three years the SNB pursued this policy with a high credibility. However, on January 15, 2015 the SNB stunned the markets by its decision to discontinue the minimum exchange rate policy. This U-turn in the SNB’s policy raised a lot of debates among economists and politicians. However, the number of research, investigating the consequences of the SNB’s actions to introduce and to drop the peg is very limited. The novelty of this topic makes the analysis of the stock markets’ reaction on the respective SNB’s announcements of high importance. The purpose of this paper is to investigate the reaction of the stock markets on the SNB’s announcements to adopt and abandon the euro Swiss franc minimum exchange rate in 2011 and 2015 respectively. Under assumptions of rationality and the informative market efficiency of the capital markets the current paper uses a well established event study approach, which is based on the concept of abnormal returns. First, the reaction of the Swiss and European stock markets is analyzed. Here, the analysis is conducted at the aggregate level. The study records an instant negative reaction on the peg’s introduction from almost all European stock markets, whereas the impact of the respective SNB’s announcement on the markets from the euro area is much stronger then the e↵ect produced on the countries from the non-euro area. The SNB’s decision to lift the minimum exchange rate results in significant positive abnormal returns for all European markets. In both cases the strongest impact is recorded for the main trading partners of Switzerland: France, Germany, Italy, Spain. The Swiss market shows similar reaction on the introduction of the exchange rate peg to the European markets. The SNB’s announcement to abandon the minimum exchange rate has a significant negative e↵ect on the Swiss market as aggregate. Interesting results are The reaction of stock markets to the Swiss National Bank communication on the euro Swiss franc peg obtained for the Danish equity market. Being the only country in the sample except Switzerland that pegs its local currency to the euro, its reaction to the SNB’s announcements replicates the one of the Swiss market. For the Swiss stock market the analysis is additionally extended to the sector and company level. Hereby, all Swiss companies traded at the SIX Swiss Exchange are grouped in industrial sectors based on the ICB classification system. Further classification of the Swiss firms is also done based on their export involvement as well as share of the revenues generated in Switzerland. The study detects clear impact of the introduction and discontinuation of the euro Swiss franc peg on a broad array of Swiss industries. In most cases the SNB’s announcement to introduce the minimum exchange rate have a negative e↵ect on the event day and positive on the day thereafter. The SNB’s decision to abandon the peg produces a significant negative reaction from the majority of the Swiss industrial sectors. The study records that the export-oriented Swiss industries are mostly a↵ected. These findings are consistent with the results obtained from the analysis based on the companies’ revenues share generated in Switzerland. Thus, the companies that generate up to 50% of their revenues abroad report the largest significant negative reaction on the SNB’s move to scrap the peg. The strongest impact in relative terms is recorded not only on the export-oriented companies, but also on the companies with lower profit margins, high costs base in Switzerland, bulk share of products invoiced in foreign currency and price sensitive customers. Thus, due to these factors such industries as chemical, machinery & electronics, metal, pharmaceutical, watch and tourism industries show strong negative reaction on the abandonment of the euro Swiss franc peg. Financial services sector is also significantly a↵ected by the SNB’s announcements on the euro Swiss franc peg. Despite high costs base denominated in Swiss francs the impact from the SNB’s actions is partially o↵set because of the multinational large financial institutions and corporations that are internationally diversified and therefore enjoy some natural hedge against exchange rate risks. Worth mentioning is the reaction of the Swiss real estate sector. Significantly positive impact of the peg’s introduction and quite immune industry’s reaction on its abandonment, which given the current immigration growth and low interest rates corroborate the attractiveness of the Swiss real estate as asset class. The reaction of stock markets to the Swiss National Bank communication on the euro Swiss franc peg A comparative analysis of two di↵erent events (introduction and discontinuation of the minimum exchange rate) indicates a much stronger and vivid market reaction on the abandonment of the euro Swiss franc peg then on its adoption. This outcome is observed both at the aggregate and sector level of research. As no studies investigating the impact of the SNB’s decisions to introduce and lift the euro Swiss franc peg on the Swiss and European stock markets have so far been identified, this paper is going to fill the gap in the existing literature, additionally also investigating the reaction of the Swiss equity market at sector and company level. |
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