Template-type: ReDIF-Paper 1.0
Author-Name: Jessica Gentner
Author-Name-First: Jessica
Author-Name-Last: Gentner
Author-Person: pge381
Title: The role of hedge funds in the Swiss franc foreign exchange market
Abstract: This paper investigates the role of hedge funds within the Swiss franc (CHF) foreign exchange (FX) market, using a novel and comprehensive flow dataset that covers a large proportion of the CHF FX market. Employing a two-stage-least-squares (2SLS) approach, I isolate the causal effect of hedge funds’ net flow on CHF returns, taking into account reverse causality. The analysis reveals that hedge funds’ net flow significantly impacts CHF returns, with a net buying of one billion leading to an approximate 0.4% increase in returns. In contrast, the net flow from other market participants has a negligible impact, even when potential reverse causality is dismissed. This influence of hedge funds’ net flow becomes particularly noticeable on days when the Swiss National Bank (SNB) delivers contractionary monetary policy surprises. On such days, even a small surprise amplifies the impact of hedge funds’ net flow significantly. The analysis of market participants’ trading prices substantiates the hypothesis that hedge funds, due to their expertise in FX forecasting and best execution as well as superior transaction timing abilities, in aggregate tend to trade at more advantageous prices than other market participants.

Length: 39 pages
Creation-Date: 2024
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2024/working_paper_2024_05
File-Format: text/html
Number: 2024-05
Classification-JEL: G12, G14, F31
Keywords: Swiss franc, Market microstructure, Asymmetric information, Monetary policy shocks
Handle: RePEc:snb:snbwpa:2024-05