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Asymmetry and Risk Premia in the Brazilian Term Structure of Interest Rates

Author

Listed:
  • Marcelo Ganem

    (PUC-RJ)

  • Tara Keshar Nanda Baidya

    (PUC-RJ)

Abstract

The risk premium in the Brazilian term structure of interest rates is partially driven by some specific defensive behavior following past monetary decisions. Until 2008, the Brazilian Central Bank has primarily dealt with domestic and external crises by raising the short term rate to restrain capital outflows, generating a well-known asymmetry in the market’s response functions to risk aversion. Therefore, the traditional parameterization of risk based on mean and variance estimators fails to capture the market price of risk eventually assigned to higher order moments of bond returns across several maturities. In this paper we propose an arbitrage-free, discrete-time model that provides the form for a lagged endogenous regression which tests the significance and magnitude of the market price of asymmetry in the Brazilian fixed income market. The results are analyzed from a historical perspective, comparing the evolution of the price of asymmetry, the improvement of Brazil’s sovereign risk and the monetary policy conduction from 2003 to 2009.

Suggested Citation

  • Marcelo Ganem & Tara Keshar Nanda Baidya, 2011. "Asymmetry and Risk Premia in the Brazilian Term Structure of Interest Rates," Brazilian Review of Finance, Brazilian Society of Finance, vol. 9(2), pages 277-301.
    • Handle: RePEc:brf:journl:v:9:y:2011:i:2:p:277-301
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    More about this item

    Keywords

    Risk premium; Asymmetry; Term structure of interest rates;
    All these keywords.

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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