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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | The Safe-Haven Status of the Swiss Franc and its Current Overvaluation against the Euro |
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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 | 117 |
| Date | 2016 |
| Abstract Text | This work considering a period spanning from January 2004 to November 2015, EUR/CHF spot exchange rates and different aggregate price indices aims at firstly calculating the PPP EUR/CHF equilibrium exchange rate and, secondly, at empirically testing the validity of the PPP. Having obtained a EUR/CHF fair value estimate of CHF 1.31 per euro, we were able to conclude that, at the time of writing, the Swiss franc remains 19% overvalued against the euro. On the other hand, by testing the coefficient restrictions imposed by the PPP theory and performing unit root tests, we were unable to find any evidence to support the PPP in either the short and long run, which led us to conclude that different factors, other than aggregate price indices are behind the behaviour of the EUR/CHF exchange rate. Besides these findings, we carried out further research in order to understand the reasons behind the current Swiss franc overvaluation. We found that the recent Swiss franc’s strength can be ascribed to both its safe-haven status and the changing preferences of Swiss investors. We documented that renewed tensions within the euro area over the course of 2015, especially over the summer, resulted in capital flowing into the Alpine country, suggesting that the Swiss franc has not yet lost its traditional safe-haven status. The macroeconomic fundamentals that validate the country’s safe-haven status are indeed structurally strong and set to remain unchanged in the near future. Furthermore, we observed that, confronted with high financial market volatility, domestic investors appear to remain risk-averse towards the rest of the world and to respond to the increasing global risk by being less inclined to invest in foreign assets. We believe that in the long run the expensive level of the Swiss franc, together with negative interest rates, will make the currency less attractive leading to a correction of its current significant overvaluation. |
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