IMF Working Papers

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

May 1, 1996

Preview Citation

Format: Chicago

Infrequent Large Nominal Devaluations and their Impacton the Futures Prices for Foreign Exchange in Brazil, (USA: International Monetary Fund, 1996) accessed November 21, 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:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 1996/049

  • Stock No:

    WPIEA0491996

  • ISBN:

    9781451846799

  • ISSN:

    1018-5941

You May Also Be Interested In...

Unlocking Adaptation Finance in Emerging Market and Developing Economies

November 19, 2024

EBA-Lite 3.0 Model and Methodology

November 18, 2024

Libya: Technical Assistance Report-Redesign of Income Tax Forms

November 15, 2024

Growth Convergence and Public Finances of India and its States

November 15, 2024