International Portfolio Holdings and Swiss Franc Asset Returns

Peter Kugler and Beatrice Weder di Mauro

No 4467, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Portfolio choice; Asset returns; Switzerland (search for similar items in EconPapers)
JEL-codes: E43 G11 G12 (search for similar items in EconPapers)
Date: 2004-07
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Citations: View citations in EconPapers (21)

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