IMF Working Papers

Mexico'S Currency Risk Premia in 1992-1994: A Closer Look At the Interest Rate Differentials

By Alejandro M. Werner

April 1, 1996

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Alejandro M. Werner Mexico'S Currency Risk Premia in 1992-1994: A Closer Look At the Interest Rate Differentials, (USA: International Monetary Fund, 1996) accessed November 23, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper studies the behavior of interest rate differentials in Mexico during the 1992-94 period. It shows that the currency risk premia is positively related to the share of peso denominated debt in total debt and that the magnitude of this effect is considerable. For every 1 percentage point increase in the ratio of peso denominated debt in total debt, the interest rate differential increases between 20 and 30 basis points. In light of this result, and to get a better measure of the expectation of a devaluation during the period, the observed interest rate differential is adjusted for the change in the composition of public debt. In contrast to the behavior of the interest rate differential, the adjusted measure remained at extremely high levels throughout 1994, signalling a low level of confidence in the announced currency band.

Subject: Crawling peg, Currencies, Depreciation, Exchange rates, Foreign exchange, Money, National accounts, Return on investment

Keywords: Crawling peg, Currencies, Currency risk premium, Depreciation, Depreciation expectation, Exchange rate, Exchange rates, Interest rate differential, Keeping peso interest rates, Return on investment, Risk premium, Share of Cetes, WP

Publication Details

  • Pages:

    24

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 1996/041

  • Stock No:

    WPIEA0411996

  • ISBN:

    9781451846058

  • ISSN:

    1018-5941

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