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Determinants of the Risk Premium in Brazilian Nominal Interest Rates

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  • Gustavo Silva Araujo
  • José Valentim Machado Vicente
  • Wagner Piazza Gaglianone

Abstract

This article investigates the determinants of the risk premium in Brazilian nominal interest rates. The risk premium reflects the compensation investors require for holding long-term bonds instead of sequentially investing in short-term bonds. The study estimates risk premiums embedded in the Brazilian yield curve and analyzes their relationship with a comprehensive set of domestic and external macroeconomic variables. This is, to our knowledge, the first application of the ACM model to Brazil using such a comprehensive macro-financial variable set. Regression results reveal that the policy rate, long-term public financing cost, inflation expectations, public debt indicators, U.S. interest rates, USD/BRL exchange rate, and global volatility measures are statistically significant drivers. The timeseries decomposition highlights the predominance of domestic interest rates and the increasing role of external shocks in periods of heightened global uncertainty. These findings contribute to the understanding of long-term interest rate dynamics in emerging markets.

Suggested Citation

  • Gustavo Silva Araujo & José Valentim Machado Vicente & Wagner Piazza Gaglianone, 2025. "Determinants of the Risk Premium in Brazilian Nominal Interest Rates," Working Papers Series 637, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:637
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    File URL: https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/WP637v3.pdf
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