Deviations from the covered interest parity: The role of fundamentals, financial and political turmoil, and market frictions

dc.creatorMarçal, Emerson Fernandes
dc.creatorCosta, Marisa Gomes da
dc.date2021-06-23
dc.date.accessioned2022-11-03T20:59:40Z
dc.date.available2022-11-03T20:59:40Z
dc.identifierhttps://bibliotecadigital.fgv.br/ojs/index.php/rbfin/article/view/81862
dc.identifier.urihttps://repositorioslatinoamericanos.uchile.cl/handle/2250/5044660
dc.descriptionRecent studies of mature markets on covered interest parity suggest that deviations are mean-reverting, but persistent, particularly after the 2008 crisis (Du et al., 2018). Our study contributes to the literature by modeling the deviations from covered interest rate parity (CIP) of an important emerging-market economy. We focus on Brazilian data, given the importance of its derivative market. One of the strengths of our study is the use of an agnostic approach, based on an automatic model-selection technique that is robust to structural change, the Autometrics algorithm (Hendry and Doornik, 2014), to unveil the possible determinants of CIP deviations from a wide information data set. We show that CIP deviations are highly sensitive to changes in Brazilian federal government total debt, level of reserves, inflation, and degree of trade openness. We also document the existence of instability in the model due to financial and political turmoil. We reach these conclusions based on the algorithm’s intercept correction, which can be seen as a byproduct of our methodology. Finally, we find evidence that, even after correction for fundamentals and instability points, CIP deviations still have persistence, suggesting that market frictions play an important role in the dynamics of CIP deviations.en-US
dc.formatapplication/pdf
dc.languageeng
dc.publisherLociedade Brasileira de Finançasen-US
dc.relationhttps://bibliotecadigital.fgv.br/ojs/index.php/rbfin/article/view/81862/79518
dc.rightsCopyright (c) 2021 Revista Brasileira de Finançaspt-BR
dc.sourceBrazilian Review of Finance; Vol. 19 No. 2 (2021): April-June; 91-122en-US
dc.sourceRevista Brasileira de Finanças; v. 19 n. 2 (2021): Abril-Junho; 91-122pt-BR
dc.source1984-5146
dc.source1679-0731
dc.subjectAutomatic model selectionen-US
dc.subjectCovered interest rate parityen-US
dc.subjectCountry risken-US
dc.subjectExchange rateen-US
dc.subjectInterest rateen-US
dc.subjectF31en-US
dc.subjectC22en-US
dc.subjectC55en-US
dc.titleDeviations from the covered interest parity: The role of fundamentals, financial and political turmoil, and market frictionsen-US
dc.typeinfo:eu-repo/semantics/article
dc.typeinfo:eu-repo/semantics/publishedVersion
dc.typeDouble blind reviewed articlesen-US
dc.typeempiricalen-US
dc.typeAvaliado por Parespt-BR


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