Estimating the term structure of volatility and fixed income derivative pricing

Estimating the parameters of the instantaneous spot interest rate process is of crucial importance for pricing fixed income derivative securities. This paper presents an estimation for the parameters of the Gaussian interest rate model for pricing fixed income derivatives based on the term structure of volatility. We estimate the term structure of volatility for US treasury rates for the period 1983 - 1995, based on a history of yield curves. We estimate both conditional and first differences term structures of volatility and subsequently estimate the implied parameters of the Gaussian model with non-linear least squares estimation. Results for bond options illustrate the effects of differing parameters in pricing.

Pricing the option adjust spread of Brazilian Eurobonds

This paper presents results of a pricing system to compute the option adjusted spread ("DAS") of Eurobonds issued by Brazilian firms. The system computes the "DAS" over US treasury rates taktng imo account the embedded options present on these bonds. These options can be calls ("callable bond"), puts ("putable bond") or combinations ("callable and putable bond"). The pricing model takes into account the evolution of the term structure along time, is compatible with the observable market term structure and is able to compute risk measures such as duration and convexity, and pricing and hedging of options on these bonds. Examples show the ejJects of the embedded options on the spread and risk measures as well as the ejJects on the spread due to variations on the volatility parameters ofthe short rate.

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.

O fator comum associado à dinâmica de preços das commodities : a relação de cointegração e o fator dinâmico

Este trabalho analisa a importância dos fatores comuns na evolução recente dos preços dos metais no período entre 1995 e 2013. Para isso, estimam-se modelos cointegrados de VAR e também um modelo de fator dinâmico bayesiano. Dado o efeito da financeirização das commodities, DFM pode capturar efeitos dinâmicos comuns a todas as commodities. Além disso, os dados em painel são aplicados para usar toda a heterogeneidade entre as commodities durante o período de análise. Nossos resultados mostram que a taxa de juros, taxa efetiva do dólar americano e também os dados de consumo têm efeito permanente nos preços das commodities. Observa-se ainda a existência de um fator dinâmico comum significativo para a maioria dos preços das commodities metálicas, que tornou-se recentemente mais importante na evolução dos preços das commodities.

Cash flow and discount rate risk decomposition and ICAPM for the US and brazilian stock markets

Esse trabalho é uma aplicação do modelo intertemporal de apreçamento de ativos desenvolvido por Campbell (1993) e Campbell e Vuolteenaho (2004) para as carteiras de Fama-French 2x3 brasileiras no period de janeiro de 2003 a abril de 2012 e para as carteiras de Fama-French 5x5 americanas em diferentes períodos. As varíaveis sugeridas por Campbell e Vuolteenaho (2004) para prever os excessos de retorno do mercado acionário americano no period de 1929 a 2001 mostraram-se também bons preditores de excesso de retorno para o mercado brasileiro no período recente, com exceção da inclinação da estrutura a termo das taxas de juros. Entretanto, mostramos que um aumento no small stock value spread indica maior excesso de retorno no futuro, comportamento que não é coerente com a explicação para o prêmio de valor sugerida pelo modelo intertemporal. Ainda, utilizando os resíduos do VAR preditivo para definir o risco de choques de fluxo de caixa e de choques nas taxas de desconto das carteiras de teste, verificamos que o modelo intertemporal resultante não explica adequadamente os retornos observados. Para o mercado norte-americano, concluímos que a abilidade das variáveis propostas para explicar os excessos de retorno do mercado varia no tempo. O sucesso de Campbell e Vuolteenaho (2004) em explicar o prêmio de valor para o mercado norte-americano na amostra de 1963 a 2001 é resultado da especificação do VAR na amostra completa, pois mostramos que nenhuma das varíaveis é um preditor de retorno estatisticamente significante nessa sub-amostra.

Interesse, ideologia & incompetência: a guerra do Iraque e o segundo consenso de Washington

Este projeto continua a avançar o programa de pesquisa que relaciona desenvolvimento econômico e democracia: pretende-se neste projeto dar um passo adiante e examinar como a democracia, uma vez consolidada como fruto do desenvolvimento capitalista, se torna ela própria um fator de desenvolvimento, particularmente quando ela deixa de ser uma mera democracia de elites para se tornar uma democracia de sociedade civil, na qual o debate público passa a ser um elemento central.

Exchange rate dynamics in Brazil

The paper aims to investigate on empirical and theoretical grounds the Brazilian exchange rate dynamics under floating exchange rates. The empirical analysis examines the short and long term behavior of the exchange rate, interest rate (domestic and foreign) and country risk using econometric techniques such as variance decomposition, Granger causality, cointegration tests, error correction models, and a GARCH model to estimate the exchange rate volatility. The empirical findings suggest that one can argue in favor of a certain degree of endogeneity of the exchange rate and that flexible rates have not been able to insulate the Brazilian economy in the same patterns predicted by literature due to its own specificities (managed floating with the use of international reserves and domestic interest rates set according to inflation target) and to externally determined variables such as the country risk. Another important outcome is the lack of a closer association of domestic and foreign interest rates since the new exchange regime has been adopted. That is, from January 1999 to May 2004, the US monetary policy has no significant impact on the Brazilian exchange rate dynamics, which has been essentially endogenous primarily when we consider the fiscal dominance expressed by the probability of default.

The political economy of exchange rate policy in Brazil: 1964-1999

This paper was developed as part of a broader research program on the political economy of exchange rate policies in Latin America and the Caribbean. We are grateful for helpful comments and suggestions from Jeff Frieden, Ernesto Stein, Jorge Streb, Marcelo Neri and seminar participants at Getulio Vargas Foundation, PUC-Rio, IDB workshop on The Political Economy of Exchange Rate Policies in Latin America and the Caribbean, and LACEA meeting in Buenos Aires. We thank René Garcia for providing us with a Fortran program for estimating the Markov Switching Model, Ilan Goldfajn for sending us updated estimates of the real exchange rate series of Goldfajn and Valdés (1996), Altamir Lopes and Ricardo Markwald for kindly furnishing data on Brazilian external accounts, and Carla Bernardes, Gabriela Domingues, Juliana Pessoa de Araújo, and, specially, Marcelo Pinheiro for excellent research assistant. Both authors thank CNPq for a research fellowship.

Ensaios sobre a estrutura a termo da taxa de juros

Esta tese é composta de três artigos que analisam a estrutura a termo das taxas de juros usando diferentes bases de dados e modelos. O capítulo 1 propõe um modelo paramétrico de taxas de juros que permite a segmentação e choques locais na estrutura a termo. Adotando dados do tesouro americano, duas versões desse modelo segmentado são implementadas. Baseado em uma sequência de 142 experimentos de previsão, os modelos propostos são comparados à benchmarks e concluí-se que eles performam melhor nos resultados das previsões fora da amostra, especialmente para as maturidades curtas e para o horizonte de previsão de 12 meses. O capítulo 2 acrescenta restrições de não arbitragem ao estimar um modelo polinomial gaussiano dinâmico de estrutura a termo para o mercado de taxas de juros brasileiro. Esse artigo propõe uma importante aproximação para a série temporal dos fatores de risco da estrutura a termo, que permite a extração do prêmio de risco das taxas de juros sem a necessidade de otimização de um modelo dinâmico completo. Essa metodologia tem a vantagem de ser facilmente implementada e obtém uma boa aproximação para o prêmio de risco da estrutura a termo, que pode ser usada em diferentes aplicações. O capítulo 3 modela a dinâmica conjunta das taxas nominais e reais usando um modelo afim de não arbitagem com variáveis macroeconômicas para a estrutura a termo, afim de decompor a diferença entre as taxas nominais e reais em prêmio de risco de inflação e expectativa de inflação no mercado americano. Uma versão sem variáveis macroeconômicas e uma versão com essas variáveis são implementadas e os prêmios de risco de inflação obtidos são pequenos e estáveis no período analisado, porém possuem diferenças na comparação dos dois modelos analisados.

Business cycles in emerging economies : the role of interest rates

This paper documents the empirical relation between the interest rates that emerging economies face in international capital markets and their business cycles. It shows that the patterns observed in the data can be interpreted as the equilibrium of a dynamic general equilibrium model of a small open economy, in which (i) firms have to pay for a fraction of the input bill before production takes place, and (ii) preferences generate a labor supply that is independent of the interest rate. In our sample, interest rates are strongly countercyclical, strongly positively correlated with net exports, and they lead the cycle. Output is very volatile and consumption is more volatile than output. The sample includes data for Argentina during 1983-2000 and for four other large emerging economies, Brazil, Mexico, Korea, and Philippines, during 1994-2000. The model is calibrated to Argentina’s economy for the period 1983-1999. When the model is fed with actual US interest rates and the actual default spreads of Argentine sovereign interest rates, interest rates alone can explain forty percent of output fluctuations. When simulated technology shocks are added to the model, it can account for the main empirical regularities of Argentina’s economy during the period. A 1% increase in country risk causes a contemporaneous fall in output of 0.5 ’subsequent recovery. An increase in US rates causes output to fall by the same on impact and by almost 2% two years after the shock. The asymetry in the effect of shocks to US rates and country risk is due to the fact that US interest rates are more persistent than country risk and that there is a significant spillover effect from US interest rates to country risk.

A comparison of test of non-linear cointegration with an application to the predictability of US interest rates using the term structure

We evaluate the forecasting performance of a number of systems models of US shortand long-term interest rates. Non-linearities, induding asymmetries in the adjustment to equilibrium, are shown to result in more accurate short horizon forecasts. We find that both long and short rates respond to disequilibria in the spread in certain circumstances, which would not be evident from linear representations or from single-equation analyses of the short-term interest rate.

In search of exchange rate predictability : a study about accuracy, consistency, and granger causality of forecasts generated by a Taylor Rule Model

Este estudo investiga o poder preditivo fora da amostra, um mês à frente, de um modelo baseado na regra de Taylor para previsão de taxas de câmbio. Revisamos trabalhos relevantes que concluem que modelos macroeconômicos podem explicar a taxa de câmbio de curto prazo. Também apresentamos estudos que são céticos em relação à capacidade de variáveis macroeconômicas preverem as variações cambiais. Para contribuir com o tema, este trabalho apresenta sua própria evidência através da implementação do modelo que demonstrou o melhor resultado preditivo descrito por Molodtsova e Papell (2009), o “symmetric Taylor rule model with heterogeneous coefficients, smoothing, and a constant”. Para isso, utilizamos uma amostra de 14 moedas em relação ao dólar norte-americano que permitiu a geração de previsões mensais fora da amostra de janeiro de 2000 até março de 2014. Assim como o critério adotado por Galimberti e Moura (2012), focamos em países que adotaram o regime de câmbio flutuante e metas de inflação, porém escolhemos moedas de países desenvolvidos e em desenvolvimento. Os resultados da nossa pesquisa corroboram o estudo de Rogoff e Stavrakeva (2008), ao constatar que a conclusão da previsibilidade da taxa de câmbio depende do teste estatístico adotado, sendo necessária a adoção de testes robustos e rigorosos para adequada avaliação do modelo. Após constatar não ser possível afirmar que o modelo implementado provém previsões mais precisas do que as de um passeio aleatório, avaliamos se, pelo menos, o modelo é capaz de gerar previsões “racionais”, ou “consistentes”. Para isso, usamos o arcabouço teórico e instrumental definido e implementado por Cheung e Chinn (1998) e concluímos que as previsões oriundas do modelo de regra de Taylor são “inconsistentes”. Finalmente, realizamos testes de causalidade de Granger com o intuito de verificar se os valores defasados dos retornos previstos pelo modelo estrutural explicam os valores contemporâneos observados. Apuramos que o modelo fundamental é incapaz de antecipar os retornos realizados.

Exchange rate misalignments and international trade policy: impacts on tariffs

The debate on “exchange wars and trade wars” is raising the attention of experts on international trade and economics. The main purpose of this paper is to analyze the impacts of exchange rate misalignments on one of the most traditional trade policy instruments – tariffs, as defined by the WTO – World Trade Organization. It is divided into three sections: the first one examines the effects of exchange rate variations on tariffs and its consequences for the multilateral trade system; the second explains the methodology used to determine exchange rate misalignments and also presents its results for Brazil, US and China; and the third summarizes the methodology applied to calculate the impacts of exchange rate misalignments on the level of tariff protection through an exercise of “misalignment tariffication”

Trade rules and exchange rate misalignments : in search for a WTO solution e medidas compensatórias

The debate on the link between trade rules and rules on exchange rates is raising the attention of experts on international trade law and economics. The main purpose of this paper is to analyze the impacts of exchange rate misalignments on tariffs as applied by the WTO – World Trade Organization. It is divided into five sections: the first one explains the methodology used to determine exchange rate misalignments and also presents its results for Brazil, US and China; the second summarizes the methodology applied to calculate the impacts of exchange rate misalignments on the level of tariff protection through an exercise of “misalignment tariffication”; the third examines the effects of exchange rate variations on tariffs and their consequences for the multilateral trading system; the fourth one creates a methodology to estimate exchange rates against a currency of the World and a proposal to deal with persistent and significant misalignments related to trade rules. The conclusions are present in the last section