A Strange Animal? The Swiss Franc Exchange Rate as a "Captured" Random Walk
Schweizerische Zeitschrift für Volkswirtschaft und Statistik / Revue Suisse d'Economie politique et de Statistique / Swiss Journal of Economics and Statistics, Volume 141, Issue 4, 2005, Pages 527-553
Keywords
nominal exchange rate, regime switching, random walk
Abstract
The paper aims to describe the behavior of the Swiss Franc - Deutsch Mark exchange rate between January 1980 and December 1998. Contrary to research results provided for other currencies a random walk is not sufficient to describe the empirical characteristics of the Swiss Franc. A regime switching approach shows that changes in the spot rate levels alternate between two regimes: a random walk and an autoregressive process. Mean reverting forces exist that "capture" the random walk within elastic bounds. Equally, we find that the volatility of the process is better described by a regime switching model and that low levels of volatility are associated with exchange rate movements close to a level of 0.80 SFR per DEM.