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The Impact of unexpected changes in the benchmark rate on the Brazilian stock market

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  • Fernando Nascimento de Oliveira

    (IBMEC-RJ)

  • Alexandre Romaguera Rodrigues da Costa

    (JAR Consultoria)

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    Abstract

    To analyze empirically the impact of unexpected changes in the basic interest rate (SELIC rate) on the Brazilian stock market between January 2003 and May 2012, we constructed a surprise measure based on the market consensus. Our sample of events is composed of 88 meetings of the Brazilian Central Bank’s Monetary Policy Committee (COPOM). There were unexpected changes in the interest rate at 32 of these meetings. The results show that for each 1% unexpected increase in the SELIC rate, the stock market index (IBOVESPA) decreased 3.28%

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    Bibliographic Info

    Article provided by Fucape Business School in its journal Brazilian Business Review.

    Volume (Year): 10 (2013)
    Issue (Month): 3 (July)
    Pages: 53-81

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    Handle: RePEc:bbz:fcpbbr:v:10:y:2013:i:3:p:53-81

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    Related research

    Keywords: SELIC rate; stock market; capital market; Bovespa; surprises; event study;

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    1. Refet Gurkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," Macroeconomics 0504013, EconWPA.
    2. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    3. Thorbecke, Willem, 1997. " On Stock Market Returns and Monetary Policy," Journal of Finance, American Finance Association, vol. 52(2), pages 635-54, June.
    4. John H. Boyd & Jian Hu & Ravi Jagannathan, 2005. "The Stock Market's Reaction to Unemployment News: Why Bad News Is Usually Good for Stocks," Journal of Finance, American Finance Association, vol. 60(2), pages 649-672, 04.
    5. Campbell, John, 1991. "A Variance Decomposition for Stock Returns," Scholarly Articles 3207695, Harvard University Department of Economics.
    6. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
    7. Roberto Rigobon & Brian Sack, 2002. "The impact of monetary policy on asset prices," Finance and Economics Discussion Series 2002-4, Board of Governors of the Federal Reserve System (U.S.).
    8. V. Vance Roley & Gordon H. Sellon, Jr., 1995. "Monetary policy actions and long-term interest rates," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 73-89.
    9. Thorbecke, Willem & Alami, Tarik, 1994. "The effect of changes in the federal funds rate target on stock prices in the 1970s," Journal of Economics and Business, Elsevier, vol. 46(1), pages 13-19, February.
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