Estimating Relative Risk Aversion, Risk-Neutral and Real-World Densities using Brazilian Real Currency Options

Building Risk-Neutral Densities (RND) from options data can provide market-implied expectations about the future behavior of a financial variable. And market expectations on financial variables may influence macroeconomic policy decisions. It can be useful also for corporate and financial institutions decision making. This paper uses the Liu et all (2007) approach to estimate the option-implied Risk-neutral densities from the Brazilian Real/US Dollar exchange rate distribution. We then compare the RND with actual exchange rates, on a monthly basis, in order to estimate the relative risk-aversion of investors and also obtain a Real-world density for the exchange rate. We are the first to calculate relative risk-aversion and the option-implied Real World Density for an emerging market currency. Our empirical application uses a sample of Brazilian Real/US Dollar options traded at BM&F-Bovespa from 1999 to 2011. The RND is estimated using a Mixture of Two Log-Normals distribution and then the real-world density is obtained by means of the Liu et al. (2007) parametric risktransformations. The relative risk aversion is calculated for the full sample. Our estimated value of the relative risk aversion parameter is around 2.7, which is in line with other articles that have estimated this parameter for the Brazilian Economy, such as Araújo (2005) and Issler and Piqueira (2000). Our out-of-sample evaluation results showed that the RND has some ability to forecast the Brazilian Real exchange rate. Abe et all (2007) found also mixed results in the out-of-sample analysis of the RND forecast ability for exchange rate options. However, when we incorporate the risk aversion into RND in order to obtain a Real-world density, the out-of-sample performance improves substantially, with satisfactory results in both Kolmogorov and Berkowitz tests. Therefore, we would suggest not using the “pure” RND, but rather taking into account risk aversion in order to forecast the Brazilian Real exchange rate.

Non-durable consumption and real-estate prices in Brazil: panel-data analysis at the state level

Housing is an important component of wealth for a typical household in many countries. The objective of this paper is to investigate the effect of real-estate price variation on welfare, trying to close a gap between the welfare literature in Brazil and that in the U.S., the U.K., and other developed countries. Our first motivation relates to the fact that real estate is probably more important here than elsewhere as a proportion of wealth, which potentially makes the impact of a price change bigger here. Our second motivation relates to the fact that real-estate prices boomed in Brazil in the last five years. Prime real estate in Rio de Janeiro and São Paulo have tripled in value in that period, and a smaller but generalized increase has been observed throughout the country. Third, we have also seen a recent consumption boom in Brazil in the last five years. Indeed, the recent rise of some of the poor to middle-income status is well documented not only for Brazil but for other emerging countries as well. Regarding consumption and real-estate prices in Brazil, one cannot imply causality from correlation, but one can do causal inference with an appropriate structural model and proper inference, or with a proper inference in a reduced-form setup. Our last motivation is related to the complete absence of studies of this kind in Brazil, which makes ours a pioneering study. We assemble a panel-data set for the determinants of non-durable consumption growth by Brazilian states, merging the techniques and ideas in Campbell and Cocco (2007) and in Case, Quigley and Shiller (2005). With appropriate controls, and panel-data methods, we investigate whether house-price variation has a positive effect on non-durable consumption. The results show a non-negligible significant impact of the change in the price of real estate on welfare consumption), although smaller then what Campbell and Cocco have found. Our findings support the view that the channel through which house prices affect consumption is a financial one.

Special interests and political business cycles

In this paper we bridge the gap between special interest politics and political business cycle literature. We build a framework where the interplay between the lobby power of special interest groups and the voting power of the majority of the population leads to political business cycles. We apply our set up to explain electoral cycles in government expenditure composition, aggregate expenditures and real exchange rates.

Does humor work in advertising of pharmaceutical products?

This thesis aims to evaluate whether humorous television commercials (TVCs) work for non-prescription drugs, known as “over-the-counter” (OTC). The construct humor in advertising is controversial since it involves complex and broad typology, and depends on the audience characteristics. Several studies within different product categories indicated that some consumer goods are better suited for humorous TVCs, while others, such as OTC drugs, may not take advantage from it. Paradoxically, drug announcers spend billions of dollars worldwide in humorous OTC ads. An experiment with real consumers was designed as between-and-within-subjects, to test three hypotheses. Sixty women were exposed to pairs of humorous and non-humorous TVCs, for each of the three drug categories (analgesics, vitamins, and laxatives). We used fictional brand names and real ads, and measured four dependant variables: attitude toward the advertising (AAD), attitude toward the brand (ABR), purchase intention (PI), and brand choice (BC), after subjects being exposed to manipulations of two independent variables: humorous vs. non-humorous TV commercials, for the drug categories. Conditional logit model confirmed that humor does not help to persuade respondents, whose choices, attitudes, and purchase intention were less favorable with humorous TVCs, in comparison to non-humorous executions. Future research is presented regarding marketing for pharmaceutical products.

A monthly indicator of Brazilian GDP. The Brazilian business cycle and growth cycle

This paper constructs an indicator of Brazilian GDP at the monthly ftequency. The peculiar instability and abrupt changes of regimes in the dynamic behavior of the Brazilian business cycle were explicitly modeled within nonlinear ftameworks. In particular, a Markov switching dynarnic factor model was used to combine several macroeconomic variables that display simultaneous comovements with aggregate economic activity. The model generates as output a monthly indicator of the Brazilian GDP and real time probabilities of the current phase of the Brazilian business cycle. The monthly indicator shows a remarkable historical conformity with cyclical movements of GDP. In addition, the estimated filtered probabilities predict ali recessions in sample and out-of-sample. The ability of the indicator in linear forecasting growth rates of GDP is also examined. The estimated indicator displays a better in-sample and out-of-sample predictive performance in forecasting growth rates of real GDP, compared to a linear autoregressive model for GDP. These results suggest that the estimated monthly indicator can be used to forecast GDP and to monitor the state of the Brazilian economy in real time.