Swiss Franc’s One-Sided Target Zone During 2011-2015

Abstract

This working paper was written by C. H. Hui (Hong Kong Monetary Authority), C. F. Lo (The Chinese University of Hong Kong) and T. Fong (Hong Kong Monetary Authority).

On 6 September 2011, a ceiling on the value of the Swiss franc was imposed, at CHF 1.2 per euro. With the continuous weakness of the euro area economy, this exchange rate limit was abandoned on 15 January 2015. This paper proposes a quasi-bounded process for the Swiss franc exchange rate dynamics under a one-sided target zone during this period, in which the exchange rate can breach the strong-side limit under a restricted condition of the relationship between the parameters of the drift term and stochastic part of the process. The empirical results using market data during 6 September 2011-14 January 2015 with a rolling one-year window suggest that this model can describe the dynamics of the Swiss franc under a one-sided target zone, where the drifting force is an increasing function of foreign reserves. While the exchange rate was bounded below the strong-side limit during most of the time, as indicated by its dynamics, the condition for breaching the limit was met in November 2014 using only information until that point, i.e., about two months before abandoning the limit.

Keywords: Exchange Rate Target Zone, Swiss Franc, Quasi-Bounded Process

JEL Classification: F31, G13