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Price Discovery in Brazilian FX Markets

Author

Listed:
  • Marcio Garcia

    () (Department of Economics PUC-Rio)

  • Marcelo Medeiros

    () (Department of Economics PUC-Rio)

  • Francisco Santos

    (Department of Economics PUC-Rio)

Abstract

Brazilian Foreign Exchange (FX) markets have a unique structure: most trades are conducted in the derivatives (futures) market. We study price discovery in the FX markets in Brazil and indicate which market (spot or futures) adjusts more quickly to the arrival of new information. We find that futures market dominates price discovery since it responds for 66.2% of the variation in the fundamental price shock and for 97.4% of the fundamental price composition. In a dynamic perspective, the futures market is also more efficient since, when markets are subjected to a shock in the fundamental price, it is faster to recover to equilibrium. By computing price discovery according to calendar semesters, we find evidence of the correlation between price discovery metrics and market factors, such as spot market supply-demand disequilibrium, central bank interventions and institutional investors’ pressure.

Suggested Citation

  • Marcio Garcia & Marcelo Medeiros & Francisco Santos, 2014. "Price Discovery in Brazilian FX Markets," Textos para discussão 622, Department of Economics PUC-Rio (Brazil).
  • Handle: RePEc:rio:texdis:622
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    References listed on IDEAS

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    Cited by:

    1. Chamon, Marcos & Garcia, Márcio, 2016. "Capital controls in Brazil: Effective?," Journal of International Money and Finance, Elsevier, vol. 61(C), pages 163-187.
    2. International Monetary Fund, 2015. "Brazil; Selected Issues Paper," IMF Staff Country Reports 15/122, International Monetary Fund.
    3. Kohlscheen, Emanuel & Andrade, Sandro C., 2014. "Official FX interventions through derivatives," Journal of International Money and Finance, Elsevier, vol. 47(C), pages 202-216.

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