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Do Swiss foreign assets hedge the business cycle?

Author

Listed:
  • Nicolas Stoffels
  • Cédric Tille
Abstract
While Switzerland's net creditor position is sizable, it has long remained steady despite large and persistent current account surpluses. This pattern reflects valuation losses on Swiss foreign assets driven by movements in exchange rates and assets prices. We compute estimates of these valuation effects and the associated rates of returns on Swiss external assets and liabilities. While Switzerland benefits from a modest advantage in terms of yields (interest and dividends in percent of holdings), we show that this has been dwarfed by valuation losses driven by the strengthening of the Swiss franc, even before the crisis. We then assess the extent to which the return on assets and liabilities (including capital gains) provides a hedge against movements in Swiss GDP and the purchasing power of income. While we find little evidence of such a hedge at a quarterly frequency, financial returns provide some offset for business cycle movements at the horizon of a year. This hedging property has strengthened since 2010 and is more pronounced for privately held assets and liabilities than for the fast-growing holdings of reserves by the Swiss National Bank.

Suggested Citation

  • Nicolas Stoffels & Cédric Tille, 2018. "Do Swiss foreign assets hedge the business cycle?," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 69(01), pages 1-40, December.
    • Handle: RePEc:usg:auswrt:2018:69:01:1-40
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    References listed on IDEAS

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    1. Burger, John D. & Warnock, Francis E. & Warnock, Veronica Cacdac, 2022. "A natural level of capital flows," Journal of Monetary Economics, Elsevier, vol. 130(C), pages 1-16.
    2. Benedetta Bianchi & Giovanna Bua, 2020. "Foreign exchange derivatives and currency mismatch in Irish investment funds," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Bridging measurement challenges and analytical needs of external statistics: evolution or revolution?, volume 52, Bank for International Settlements.

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    More about this item

    Keywords

    valuation effects; international risk sharing;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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