The Swiss franc safety premium.

This paper applies a recent method proposed by Maggiori (The U.S. Dollar Safety Premium, 2013) to estimate the Swiss franc safety premium. The results show that the three-step instrumental variable approach as used by Maggiori does not work for the Swiss franc exchange rates. The price of risk estimates take unrealistic, negative values. One possible explanation is that the approach as it is used by Maggiori suffers from a measurement error for the expected exchange rate which represents a potential source of imprecision. By using the prediction of an augmented Fama regression to measure the expected exchange rate change, this measurement error can be avoided and the safety premium estimates become more realistic and closer to those obtained with a maximum likelihood-estimated GARCH approach. Overall, however, the GARCH approach still seems to be preferable to the instrumental variable approach.