Efficiency of financial markets after unforeseen events: The Swiss National Bank's cap on the Franc against the Euro

On September 6, 2011, the Swiss National Bank (SNB) announced that it would implement a cap on the Swiss Franc (CHF) against the Euro (EUR) at a level of 1.20 CHF per EUR. On January 15, 2015, the Swiss National Bank (SNB) announced that it would no longer actively support the cap. The cap had been in place for about 3 1/2 years and it had kept the CHF/EUR exchange rate at or above 1.20 CHF per EUR. While the introduction of the cap was quickly absorbed by the financial markets, the decision of the SNB to remove it immediately sent shockwaves through the financial markets, created huge volatility spikes in foreign exchange rates, and affected a wide range of institutions and persons, from hedge funds and banks to homeowners in Eastern Europe who held foreign exchange mortgages denominated in CHF. Within minutes after the announcement, the CHF appreciated against the USD and the EUR by about 20%.

This paper analyzes the effects of the SNB decision in different ways. First, we describe the SNB's motivations for first introducing, and then later removing the cap at these particular times. Second, we specifically analyze the short and medium term consequences of the SNB's decision for the Swiss Economy. Third, we show examples of how various governments, states, municipalities, companies, and private citizens who held Swiss Franc debt were suddenly facing significant changes to interest and principal repayments. Fourth, we look into an accompanying measure the Swiss National Bank took concurrently with the removal of the cap, which was the introduction of negative interest rates.

The main part of the paper analyzes how quickly the Swiss Franc reached a new equilibrium. By analyzing minute-per-minute market data for the CHF/EUR echange rate on the day of the introduction of the cap (Sep 6, 2011) as well as the removal of the cap (January 15, 2015) we show that a first period of high volatility stabilizes at a new level within approximately 20 minutes, but that uncertainty among traders leads to severe trading restrictions, which can last for several hours. The removal of the cap by the SNB provides a rare example of how exchange rates find a new equilibrium after a shock-like change from a fixed rate to a floating rate regime.