The Demise of the Swiss Interest Rate Puzzle

In this paper we analyzed the violations of UIP for the Swiss Franc against the Dollar, the Euro, the Yen, thePound and the Canadian Dollar using recent data up to fall 2008. This exercise provides the following mainresults : first the Swiss interest rate puzzle disappeared, i.e. mean returns on Swiss Franc assets are no longersystematically and significantly lower (as in the 1980 – 1998 sample) when compared jointly with othermajor currencies in the 1999 to 2008 period. Second and in contrast to earlier evidence we failed to findevidence that geopolitical crises lead to an appreciation of the Swiss Franc in the last ten years. Third eventhe short run validity of UIP cannot be rejected for the Swiss Franc against the five currencies for the 1999 –2008 sample. Unfortunately our attempt to locate the time of change and the currencies involved by theapplication of tests for structural breaks with unknown break point did not lead to clear cut conclusion for theEuro and the Dollar, the two most important foreign currencies from a Swiss perspective.