Infrequent Large Nominal Devaluations and their Impacton the Futures Prices for Foreign Exchange in Brazil

May 1, 1996

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Infrequent Large Nominal Devaluations and their Impacton the Futures Prices for Foreign Exchange in Brazil, (USA: International Monetary Fund, 1996) accessed December 26, 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 discusses the behavior of futures prices for foreign exchange in Brazil during a period of high inflation and successive stabilization attempts (1989-92). After testing for futures prices unbiasedness and predicability by applying the Generalized Method of Moments, the paper argues that the finding of excess returns may be viewed as a rational response to the frequent and unpredictable changes in the exchange rate policy during that period. This response could reflect (i) an informational problem where the exchange rate policy is assumed to be unknown; or, (ii) a “peso” problem of rational (under) overprediction where the futures bias is the market response to the known policy of infrequent large nominal devaluations. The second line of explanation is suggested by conditioning the probability distribution of the excess return of futures contracts on the event of a major devaluation.

Subject: Econometric analysis, Estimation techniques, Exchange rate devaluation, Financial institutions, Financial markets, Foreign exchange, Futures, Futures markets, National accounts, Return on investment

Keywords: Devaluation agent, Devaluation rate, Estimation techniques, Exchange rate, Exchange rate devaluation, Expected devaluation, Forecast error, Futures, Futures markets, Inequality coefficient, Last trading day, Least squares, Periods Ft, Return on investment, Risk premium, Risk premium Rt, Risk premium test, Sample period, Underpredicting FT, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1996/049
Stock No:

WPIEA0491996
ISBN:

9781451846799
ISSN:

1018-5941

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