Working Paper: CEPR ID: DP4467
Authors: Peter Kugler; Beatrice Weder
Abstract: This Paper revisits the puzzle of low returns on Swiss franc assets using a new dataset of international portfolio holdings at Swiss banks. The main findings are as follows. First, we find that the return anomaly is present only for fixed income assets and not for equity. Second, it is mostly due to a long run deviation from uncovered interest rate parity, not a deviation from purchasing power parity. Third, it is unlikely that foreign demand for Swiss assets (possibly due to banking secrecy) is driving down returns: this demand is quantitatively small especially for Swiss franc fixed income instruments. A dynamic factor analysis confirms that foreign demand had almost no impact on Swiss franc asset prices. Finally, we propose a new explanation for low returns on Swiss fixed income assets, namely the diversification benefits offered by these instruments. Applying reversed portfolio optimization to back out the implied returns reveals that the estimated pattern of this returns conforms very well to the observed pattern.
Keywords: asset returns; portfolio choice; Switzerland
JEL Codes: E43; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Asset type (G19) | Return differentials (C69) |
| Deviation from UIP (F29) | Return differentials (C69) |
| Foreign demand (F29) | Returns on Swiss fixed income assets (G12) |
| Diversification benefits (G11) | Returns on Swiss fixed income assets (G12) |