Efficient Arbitrage Under Financial Indexation: The Case of Chile

May 1, 1991

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Enrique G. Mendoza Efficient Arbitrage Under Financial Indexation: The Case of Chile, (USA: International Monetary Fund, 1991) 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

Legal restrictions governing financial transactions in Chile have produced a system in which most financial assets are either 30-day non-indexed assets or 90-day indexed assets. This paper analyzes data on the rates of return of these assets to determine the extent to which efficient arbitrage takes place under conditions of partial financial indexation. The data cannot reject the joint hypothesis that participants in financial markets formulate their expectations rationally and that these markets operate efficiently. The data also shows that the indexed/non-indexed interest spread is an accurate predictor of future changes in inflation. The significant implications of these findings for the conduct of monetary policy are also discussed in some detail.

Subject: Economic theory, Financial services, Inflation, Prices, Rational expectations, Real interest rates

Keywords: Financial system, Indexation mechanism, Indexation system, Inflation, Inflation rate, Inflation risk, Inflation-risk component, Market efficiency, Rational expectations, Real interest rates, UF premium, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1991/049
Stock No:

WPIEA0491991
ISBN:

9781451971668
ISSN:

1018-5941

Notes

Also published in Staff Papers, Vol. 39, No. 1, March 1992.

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