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Is it Risk? An Automated Approach to Explain the ex ante UIP Deviations of Brazil

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Author Info
Alex Luiz Ferreira.

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Abstract

The paper tests whether ex ante deviations from Uncovered Interest Rate Parity correspond to default risk premium. Using an automated model selection criteria and data for Brazil (from november 2001 until december 2007), we found that deviations are correlated with a measure of risk (the EMBI+). There is also evidence that these deviations can be explained and predicted by a set of fundamentals (such as the current account deficit as a percentage of the GDP and domestic inflation, for example). Insofar as some of these variables can be controlled by the government, the results suggest that economic policy is able to decrease risk.

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Publisher Info
Article provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its journal Cuadernos de Economía.

Volume (Year): 46 (2009)
Issue (Month): 133 ()
Pages: 51-66
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Handle: RePEc:ioe:cuadec:v:46:y:2009:i:133:p:51-66

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Related research
Keywords: Uncovered Interest Rate Parity; Risk; Model Evaluation and Testing.;

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Find related papers by JEL classification:
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

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  1. Alper, C. Emre & Ardic, Oya Pinar & Fendoglu, Salih, 2007. "The Economics of Uncovered Interest Parity Condition for Emerging Markets: A Survey," MPRA Paper 4079, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Clarida, Richard H. & Sarno, Lucio & Taylor, Mark P. & Valente, Giorgio, 2003. "The out-of-sample success of term structure models as exchange rate predictors: a step beyond," Journal of International Economics, Elsevier, vol. 60(1), pages 61-83, May. [Downloadable!] (restricted)
    Other versions:
  3. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Ewing, Bradley T., 2003. "The response of the default risk premium to macroeconomic shocks," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 261-272. [Downloadable!] (restricted)
  5. Knot, Klaas & de Haan, Jakob, 1995. "Interest rate differentials and exchange rate policies in Austria, The Netherlands, and Belgium," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 363-386, May. [Downloadable!] (restricted)
  6. Charles Engel, 1996. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November. [Downloadable!] (restricted)
  8. David F. Hendry & Hans-Martin Krolzig, 2004. "We Ran One Regression," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(5), pages 799-810, December. [Downloadable!] (restricted)
  9. Chinn, Menzie D., 2006. "The (partial) rehabilitation of interest rate parity in the floating rate era: Longer horizons, alternative expectations, and emerging markets," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 7-21, February. [Downloadable!] (restricted)
  10. Martín Grandes, 2007. "The Determinants of Sovereign Bond Spreads: Theory and Facts From Latin America," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 44(130), pages 151-181. [Downloadable!]
  11. David F. Hendry & Hans-Martin Krolzig, 2004. "We Ran One Regression," Economics Papers 2004-W17, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
  12. Froot, Kenneth A & Frankel, Jeffrey A, 1989. "Forward Discount Bias: Is It an Exchange Risk Premium?," The Quarterly Journal of Economics, MIT Press, vol. 104(1), pages 139-61, February. [Downloadable!] (restricted)
    Other versions:
  13. Robert E. Cumby, 1987. "Is it Risk? Explaining Deviations from Uncovered Interest Parity," NBER Working Papers 2380, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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