Peg Abandonment and Cross-Currency Contagion

Author:

Balke Florian1,Barth Andreas123ORCID,Reichel Arne1ORCID,Wahrenburg Mark1

Affiliation:

1. Goethe University Frankfurt, 60323 Frankfurt/Main, Germany;

2. Saarland University Saarbrücken, 66123 Saarbrücken, Germany;

3. Leibniz-Institut für Wirtschaftsforschung Halle, 06108 Halle (Saale), Germany

Abstract

Using a novel data set comprising bid–ask quotes for foreign exchange swaps from individual dealers, we examine the consequences of the Swiss National Bank’s sudden termination of the Swiss franc/euro minimum exchange rate in 2015 on other pegged currencies. Our findings indicate a spillover effect as dealer banks began to reassess the risk associated with unexpected peg terminations, subsequently leading to wider bid–ask spreads for pegged currencies. This highlights that, even in strong economies, the credibility of a currency peg is influenced not only by the actions of the respective central bank but also by the stability of other pegged currencies. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01117 .

Publisher

Institute for Operations Research and the Management Sciences (INFORMS)

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