Unit roots in the presence of abrupt governmental interventions with an application to Brazilian ... more Unit roots in the presence of abrupt governmental interventions with an application to Brazilian data Texto para discussão, No. 349
The views and interpretations in this document are those of the authors and should not be attribu... more The views and interpretations in this document are those of the authors and should not be attributed to the Inter-American Development Bank, or to any individual acting on its behalf. This paper may be freely reproduced provided credit is given to the Research Department, Inter-American Development Bank. The Research Department (RES) produces a quarterly newsletter, IDEA (Ideas for Development in the Americas), as well as working papers and books on diverse economic issues. To obtain a complete list of RES publications, and read or download them please visit our web site at: http://www.iadb.org/res.
We analyze the unique intervention strategy of the BCB using DNDFs (Domestic-Non-Deliverable Forw... more We analyze the unique intervention strategy of the BCB using DNDFs (Domestic-Non-Deliverable Forwards): currency forwards that settle in domestic currency. We show the mechanisms through which DNDFs provide efficient hedging instruments for economic agents in times of reduced capital inflows and FX volatility, and how the use of DNDFs provide incentives for commercial banks to bring dollar to Brazil and so help finance the current account deficit. We discuss the limits to this strategy, which will work insofar as economic agents believe they can go from DNDFs to spot USD, i.e., that convertibility risk is negligible. We also have described how the strategy creates increasing positions within the commercial banking system (basis and roll over risks), generating possible threats to financial stability. The gain of not having to sell down hard currency reserves in the present strategy should be weighed against these risks. We conclude that the BCB's strategy does provide an alternative intervention strategy, which is made possible only due to specific features of the Brazilian financial markets and its legislation. It is not clear that other emerging markets would profit from adopting such intervention strategy in FX markets.
Analiso a evolucao das taxas de juros e câmbio desde o Plano Real. O objetivo e mostrar como a in... more Analiso a evolucao das taxas de juros e câmbio desde o Plano Real. O objetivo e mostrar como a inter-relacao entre essas duas variaveis macroeconomicas evoluiu ao longo das ultimas duas decadas, gerando a atual configuracao de custo de capital para as empresas brasileiras. O capitulo finaliza com uma agenda de tarefas a serem cumpridas para permitir reduzir o custo de capital, assim estimulando o investimento e aumentando o crescimento economico.
O tema abordado pelo professor Cardim -a relação entre teoria e política monetárias -é de extrema... more O tema abordado pelo professor Cardim -a relação entre teoria e política monetárias -é de extrema importância para todos que vêem a economia como uma ciência cujo sucesso deve ser medido por resultados práticos em termos de maior crescimento econômico, mais empregos, menos pobreza e miséria e melhor distribuição de renda e riqueza. A discussão dessa difícil relação deve, como conseqüência prática, iluminar o debate atual sobre política monetária no Brasil. Em sua visão pessoal sobre a relação entre teoria e prática monetária, o professor Cardim descreve a trajetória do pensamento econômico no último século, ressaltando a sua relevância para a concepção e implementação da teoria monetária. Talvez pelo exíguo espaço disponível, a análise, levada ao extremo, acaba por simplificar excessivamente o debate atual, antagonizando artificialmente os "keynesianos" aos "monetaristas". Ao concluir que o regime de metas de inflação é uma herança monetarista, cujo objetivo é apenas a estabilidade de preços, o professor Cardim alega que, no caso brasileiro, este regime "parece ter ultrapassado sua utilidade" (pág. 330), sugerindo uma abordagem em que os objetivos reais sejam incorporados junto aos nominais. Tais conclusões nos parecem equivocadas pelas razões que passamos a expor. De acordo com o professor Cardim, a separação entre teoria e política monetária, vigente nas últimas décadas, iniciou-se com as críticas monetaristas ao keynesianismo dominante na década de 1950. Conforme o monetarismo se consolidava como posição hegemônica, o fosso entre teoria e prática aumentava, "até praticamente o rompimento entre ambas" (pág. 316).
The estimation of the impact of macroeconomic announcements on the Brazilian futures markets is u... more The estimation of the impact of macroeconomic announcements on the Brazilian futures markets is used to uncover the relationship between macroeconomic fundamentals and asset prices. Using intraday data from October 2008 to January 2011, we find that external macroeconomic announcements dominate price changes in the Foreign Exchange and Ibovespa markets, while the impact of the domestic ones is mainly restricted to interest rate contracts. We additionally propose an investment strategy based on the conditional price reaction of each market that achieved a success rate of 70% in an outof-sample study. Finally, we document the impact on volume and bid-ask spreads.
The Quarterly Review of Economics and Finance, 2012
Since the conquest of hyperinflation, with the Real Plan, in 1994, the Brazilian financial system... more Since the conquest of hyperinflation, with the Real Plan, in 1994, the Brazilian financial system has grown from early infancy to late adolescence. We describe the process of maturing with emphasis on the defining features of the Brazilian financial system over the last 20 years: 1) stabilization and the subsequent financial crisis; 2) universality of banks; 3) market segmentation through public lending; 4) institutional improvement. Further paraphrasing Díaz-Alejandro (1984), we raise some hypotheses on why, this time, the financial boom has not (at least yet) turned into a financial crash.
We study price discovery in the Brazilian Foreign Exchange (FX) markets and indicate which market... more We study price discovery in the Brazilian Foreign Exchange (FX) markets and indicate which market (spot or futures) adjusts more quickly to the arrival of new information. We find that the futures market dominates price discovery since it accounts for 66.2 % of the variation in the fundamental price shock and 97.4 % of the fundamental price composition. This corroborates results from previous studies that, in a unique world example, the exchange rate is formed in the futures market. In a dynamic perspective, the futures market is also more efficient since equilibrium is more quickly restored when markets are subjected to a shock in the fundamental price. By computing price discovery according to calendar semesters, we find evidence of the correlation between price discovery metrics and market factors, such as spot market supply-demand disequilibrium, central bank interventions, and institutional investors’ pressure.
expressed herein are those of the author(s) and do not necessarily reflect the views of the Natio... more expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau
October 19-20, 2006, for helpful comments; and especially to Gonzalo Llosa for first-rate researc... more October 19-20, 2006, for helpful comments; and especially to Gonzalo Llosa for first-rate research assistance and literature search, and John Smith for expert editing. The usual caveats apply. The views expressed here do not necessarily represent those of the IDB or the Ntional Bureau of Economic Research.
Does competition among financial intermediaries lead to excessively low standards? To examine thi... more Does competition among financial intermediaries lead to excessively low standards? To examine this question, we construct a model where financial intermediaries design contracts to attract trading volume, taking into consideration that traders may default and that traders differ in credit quality. When credit quality is observable, the competitive equilibrium achieves constrained optimality – exchanges demand the “right ” amount of guarantees. A monopolist would demand fewer contractual guarantees. The presence of private information about credit quality has an ambiguous effect in a competitive environment. If default is relatively costly, private information increases standards in equilibrium. When default is relatively inexpensive, private information leads to a decrease in standards.
This paper investigates the patterns and determinants of the currency risk premium in two currenc... more This paper investigates the patterns and determinants of the currency risk premium in two currency boards - Argentina and Hong Kong. Despite the presumed rigidity of currency boards, the currency premium is almost always positive and at times very large. Its term structure is usually upward sloping, but flattens out or even becomes inverted at times of turbulence. Currency premia differ across markets. The forward discount typically exceeds the currency premium derived from interbank rates, particularly during crisis times. The large magnitude of these cross-market differences can be the consequence of unexploited arbitrage opportunities, market segmentation, or other risks embedded in typical measures of currency risk. The premium and its term structure depend on domestic and global factors, related to devaluation expectations and risk perceptions.
If country and currency risk premiums are positively correlated, a negative international liquidi... more If country and currency risk premiums are positively correlated, a negative international liquidity shock harms twice the economy, thereby substantially increasing interest rates. This harmful positive correlation between country and currency risk premiums observed in some countries is called cousin risks. We, first, identify the extent of this phenomenon by separating a sample of countries into two groups: the one where the positive correlation is observed and the one where it is not. Based on this taxonomy, we investigate the determinants of the cousin risks. Results indicate that currency mismatch and low financial deepening are strongly associated with the phenomenon
Starting with Lehman Brother’s demise in September 2008, the Brazilian real fell 42% vis-a-vis th... more Starting with Lehman Brother’s demise in September 2008, the Brazilian real fell 42% vis-a-vis the US dollar. Such large exchange rate depreciation would typically cheer exporters up. However, it was later found that many export firms, including multibillion dollar ones, had suffered large financial losses. These capital losses came not from garden variety currency mismatches, but from complex derivative products. We analyze the problems created by this misuse of derivatives by export companies in Brazil in 2008. Besides a careful description of the most relevant cases and of the derivative that caused the problems, we also present evidence that the derivative was not used as a hedge, but as a speculative instrument. The Brazilian case—just one among many where export firms in emerging markets sold USD short much beyond the point necessary to hedge their USD revenues—shows that the benefits of international reserves accumulation by the government may be jeopardized by perverse incen...
In the most recent wave of capital inflows, 2009-2012, many emerging markets have resorted to ste... more In the most recent wave of capital inflows, 2009-2012, many emerging markets have resorted to sterilized FX purchases as a way to mitigate exchange rate appreciation. The literature on the effectiveness of sterilized FX interventions to alter the exchange rate is large and inconclusive, but there is scant mention to expansionary effects of FX sterilized purchases other than the effect of possible exchange-rate depreciation on net exports. Nevertheless, many emerging markets’ central banks have complained that the (fully sterilized) capital inflows have fueled large credit expansions, creating credit bubbles and inflation. We show that, indeed, when the banking sector is duly considered, sterilized FX purchases became expansionary, via a credit channel. The mechanism is the following: under massive sterilized FX purchases, the aggregate banking sector balance sheet increases, with the asset side absorbing the bonds used to sterilize the money expansion generated by the sterilized FX ...
We show that high-dimensional econometric models, such as shrinkage and complete subset regressio... more We show that high-dimensional econometric models, such as shrinkage and complete subset regression, perform very well in the real-time forecasting of inflation in data-rich environments. We use Brazilian inflation as an application. It is ideal as an example because it exhibits a high short-term volatility, and several agents devote extensive resources to forecasting its short-term behavior. Thus, precise forecasts made by specialists are available both as a benchmark and as an important candidate regressor for the forecasting models. Furthermore, we combine forecasts based on model confidence sets and show that model combination can achieve superior predictive performances.
Since the mid 1990s, theories of speculative attacks have argued that fixed exchange rate regimes... more Since the mid 1990s, theories of speculative attacks have argued that fixed exchange rate regimes induce excessive borrowing in foreign currency as an optimal response to implicit guarantes that the government will not devalue the domestic currency. Using data on Brazilian firms before and after the end of the fixed exchange rate regime in 1999, we estimate the relevance of the implicit guarantees by comparing the changes in foreign debt of two groups of firms: those that hedged their foreign currency debt prior to the exchange rate float and those that did not. Using the difference-in-differences approach, in which firm-specific characteristics are introduced as control variables, we exclude macroeconomic effects of the change in the exchange rate regime and possible differences in foreign debt trends of the two groups of firms, thus obtaining an estimate of the impact of the implicit guarantees on borrowing in foreign currency. The results suggest that the implicit guarantees do n...
This paper examines the recent evolution of the Brazilian public domestic debt and interprets it ... more This paper examines the recent evolution of the Brazilian public domestic debt and interprets it in light of the confidence crisis literature. The analysis of the recent developments in the Brazilian public domestic debt market shows that the likelihood of a default must not be assessed only using simple summary aggregate measures of public domestic debt size and maturity, but must also consider other structural aspects. Our analysis emphasizes the two main pillars of the Brazilian public domestic debt market: home-bias and the role of the banking sector in intermediating the debt. Evidence from yields of a “perfectly” indexed bond shows that the rollover premium was very small when the devaluation occurred, and is still fairly small by October, 1999, indicating that the rollover of the public domestic debt is not, so far, a serious problem. Positive prospects for the public domestic debt market will depend, however, on the Brazilian government maintaining the current fiscal austeri...
Despite the fall in the interest rate observed in Brazil in recent decades, and specific regulati... more Despite the fall in the interest rate observed in Brazil in recent decades, and specific regulations on the private pension segment that encourage long-term risk taking, institutions in this segment appear to be considerably sensitive to short-term factors, while avoiding exposure to long-term risk factors. With portfolio allocation data from large entities, we implemented a VAR model to evaluate the impact of interest rate changes on portfolio management decisions and performed a counterfactual analysis to define the causal effect of regulation on additional risk taking. Results indicate that interest rate increases lead to significant and persistent reduction of investment in riskier assets with longer maturities, while the implemented regulation was not able to force greater risk-taking by institutions, in addition to generating distortions in segments of the Brazilian financial market.
Unit roots in the presence of abrupt governmental interventions with an application to Brazilian ... more Unit roots in the presence of abrupt governmental interventions with an application to Brazilian data Texto para discussão, No. 349
The views and interpretations in this document are those of the authors and should not be attribu... more The views and interpretations in this document are those of the authors and should not be attributed to the Inter-American Development Bank, or to any individual acting on its behalf. This paper may be freely reproduced provided credit is given to the Research Department, Inter-American Development Bank. The Research Department (RES) produces a quarterly newsletter, IDEA (Ideas for Development in the Americas), as well as working papers and books on diverse economic issues. To obtain a complete list of RES publications, and read or download them please visit our web site at: http://www.iadb.org/res.
We analyze the unique intervention strategy of the BCB using DNDFs (Domestic-Non-Deliverable Forw... more We analyze the unique intervention strategy of the BCB using DNDFs (Domestic-Non-Deliverable Forwards): currency forwards that settle in domestic currency. We show the mechanisms through which DNDFs provide efficient hedging instruments for economic agents in times of reduced capital inflows and FX volatility, and how the use of DNDFs provide incentives for commercial banks to bring dollar to Brazil and so help finance the current account deficit. We discuss the limits to this strategy, which will work insofar as economic agents believe they can go from DNDFs to spot USD, i.e., that convertibility risk is negligible. We also have described how the strategy creates increasing positions within the commercial banking system (basis and roll over risks), generating possible threats to financial stability. The gain of not having to sell down hard currency reserves in the present strategy should be weighed against these risks. We conclude that the BCB's strategy does provide an alternative intervention strategy, which is made possible only due to specific features of the Brazilian financial markets and its legislation. It is not clear that other emerging markets would profit from adopting such intervention strategy in FX markets.
Analiso a evolucao das taxas de juros e câmbio desde o Plano Real. O objetivo e mostrar como a in... more Analiso a evolucao das taxas de juros e câmbio desde o Plano Real. O objetivo e mostrar como a inter-relacao entre essas duas variaveis macroeconomicas evoluiu ao longo das ultimas duas decadas, gerando a atual configuracao de custo de capital para as empresas brasileiras. O capitulo finaliza com uma agenda de tarefas a serem cumpridas para permitir reduzir o custo de capital, assim estimulando o investimento e aumentando o crescimento economico.
O tema abordado pelo professor Cardim -a relação entre teoria e política monetárias -é de extrema... more O tema abordado pelo professor Cardim -a relação entre teoria e política monetárias -é de extrema importância para todos que vêem a economia como uma ciência cujo sucesso deve ser medido por resultados práticos em termos de maior crescimento econômico, mais empregos, menos pobreza e miséria e melhor distribuição de renda e riqueza. A discussão dessa difícil relação deve, como conseqüência prática, iluminar o debate atual sobre política monetária no Brasil. Em sua visão pessoal sobre a relação entre teoria e prática monetária, o professor Cardim descreve a trajetória do pensamento econômico no último século, ressaltando a sua relevância para a concepção e implementação da teoria monetária. Talvez pelo exíguo espaço disponível, a análise, levada ao extremo, acaba por simplificar excessivamente o debate atual, antagonizando artificialmente os "keynesianos" aos "monetaristas". Ao concluir que o regime de metas de inflação é uma herança monetarista, cujo objetivo é apenas a estabilidade de preços, o professor Cardim alega que, no caso brasileiro, este regime "parece ter ultrapassado sua utilidade" (pág. 330), sugerindo uma abordagem em que os objetivos reais sejam incorporados junto aos nominais. Tais conclusões nos parecem equivocadas pelas razões que passamos a expor. De acordo com o professor Cardim, a separação entre teoria e política monetária, vigente nas últimas décadas, iniciou-se com as críticas monetaristas ao keynesianismo dominante na década de 1950. Conforme o monetarismo se consolidava como posição hegemônica, o fosso entre teoria e prática aumentava, "até praticamente o rompimento entre ambas" (pág. 316).
The estimation of the impact of macroeconomic announcements on the Brazilian futures markets is u... more The estimation of the impact of macroeconomic announcements on the Brazilian futures markets is used to uncover the relationship between macroeconomic fundamentals and asset prices. Using intraday data from October 2008 to January 2011, we find that external macroeconomic announcements dominate price changes in the Foreign Exchange and Ibovespa markets, while the impact of the domestic ones is mainly restricted to interest rate contracts. We additionally propose an investment strategy based on the conditional price reaction of each market that achieved a success rate of 70% in an outof-sample study. Finally, we document the impact on volume and bid-ask spreads.
The Quarterly Review of Economics and Finance, 2012
Since the conquest of hyperinflation, with the Real Plan, in 1994, the Brazilian financial system... more Since the conquest of hyperinflation, with the Real Plan, in 1994, the Brazilian financial system has grown from early infancy to late adolescence. We describe the process of maturing with emphasis on the defining features of the Brazilian financial system over the last 20 years: 1) stabilization and the subsequent financial crisis; 2) universality of banks; 3) market segmentation through public lending; 4) institutional improvement. Further paraphrasing Díaz-Alejandro (1984), we raise some hypotheses on why, this time, the financial boom has not (at least yet) turned into a financial crash.
We study price discovery in the Brazilian Foreign Exchange (FX) markets and indicate which market... more We study price discovery in the Brazilian Foreign Exchange (FX) markets and indicate which market (spot or futures) adjusts more quickly to the arrival of new information. We find that the futures market dominates price discovery since it accounts for 66.2 % of the variation in the fundamental price shock and 97.4 % of the fundamental price composition. This corroborates results from previous studies that, in a unique world example, the exchange rate is formed in the futures market. In a dynamic perspective, the futures market is also more efficient since equilibrium is more quickly restored when markets are subjected to a shock in the fundamental price. By computing price discovery according to calendar semesters, we find evidence of the correlation between price discovery metrics and market factors, such as spot market supply-demand disequilibrium, central bank interventions, and institutional investors’ pressure.
expressed herein are those of the author(s) and do not necessarily reflect the views of the Natio... more expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau
October 19-20, 2006, for helpful comments; and especially to Gonzalo Llosa for first-rate researc... more October 19-20, 2006, for helpful comments; and especially to Gonzalo Llosa for first-rate research assistance and literature search, and John Smith for expert editing. The usual caveats apply. The views expressed here do not necessarily represent those of the IDB or the Ntional Bureau of Economic Research.
Does competition among financial intermediaries lead to excessively low standards? To examine thi... more Does competition among financial intermediaries lead to excessively low standards? To examine this question, we construct a model where financial intermediaries design contracts to attract trading volume, taking into consideration that traders may default and that traders differ in credit quality. When credit quality is observable, the competitive equilibrium achieves constrained optimality – exchanges demand the “right ” amount of guarantees. A monopolist would demand fewer contractual guarantees. The presence of private information about credit quality has an ambiguous effect in a competitive environment. If default is relatively costly, private information increases standards in equilibrium. When default is relatively inexpensive, private information leads to a decrease in standards.
This paper investigates the patterns and determinants of the currency risk premium in two currenc... more This paper investigates the patterns and determinants of the currency risk premium in two currency boards - Argentina and Hong Kong. Despite the presumed rigidity of currency boards, the currency premium is almost always positive and at times very large. Its term structure is usually upward sloping, but flattens out or even becomes inverted at times of turbulence. Currency premia differ across markets. The forward discount typically exceeds the currency premium derived from interbank rates, particularly during crisis times. The large magnitude of these cross-market differences can be the consequence of unexploited arbitrage opportunities, market segmentation, or other risks embedded in typical measures of currency risk. The premium and its term structure depend on domestic and global factors, related to devaluation expectations and risk perceptions.
If country and currency risk premiums are positively correlated, a negative international liquidi... more If country and currency risk premiums are positively correlated, a negative international liquidity shock harms twice the economy, thereby substantially increasing interest rates. This harmful positive correlation between country and currency risk premiums observed in some countries is called cousin risks. We, first, identify the extent of this phenomenon by separating a sample of countries into two groups: the one where the positive correlation is observed and the one where it is not. Based on this taxonomy, we investigate the determinants of the cousin risks. Results indicate that currency mismatch and low financial deepening are strongly associated with the phenomenon
Starting with Lehman Brother’s demise in September 2008, the Brazilian real fell 42% vis-a-vis th... more Starting with Lehman Brother’s demise in September 2008, the Brazilian real fell 42% vis-a-vis the US dollar. Such large exchange rate depreciation would typically cheer exporters up. However, it was later found that many export firms, including multibillion dollar ones, had suffered large financial losses. These capital losses came not from garden variety currency mismatches, but from complex derivative products. We analyze the problems created by this misuse of derivatives by export companies in Brazil in 2008. Besides a careful description of the most relevant cases and of the derivative that caused the problems, we also present evidence that the derivative was not used as a hedge, but as a speculative instrument. The Brazilian case—just one among many where export firms in emerging markets sold USD short much beyond the point necessary to hedge their USD revenues—shows that the benefits of international reserves accumulation by the government may be jeopardized by perverse incen...
In the most recent wave of capital inflows, 2009-2012, many emerging markets have resorted to ste... more In the most recent wave of capital inflows, 2009-2012, many emerging markets have resorted to sterilized FX purchases as a way to mitigate exchange rate appreciation. The literature on the effectiveness of sterilized FX interventions to alter the exchange rate is large and inconclusive, but there is scant mention to expansionary effects of FX sterilized purchases other than the effect of possible exchange-rate depreciation on net exports. Nevertheless, many emerging markets’ central banks have complained that the (fully sterilized) capital inflows have fueled large credit expansions, creating credit bubbles and inflation. We show that, indeed, when the banking sector is duly considered, sterilized FX purchases became expansionary, via a credit channel. The mechanism is the following: under massive sterilized FX purchases, the aggregate banking sector balance sheet increases, with the asset side absorbing the bonds used to sterilize the money expansion generated by the sterilized FX ...
We show that high-dimensional econometric models, such as shrinkage and complete subset regressio... more We show that high-dimensional econometric models, such as shrinkage and complete subset regression, perform very well in the real-time forecasting of inflation in data-rich environments. We use Brazilian inflation as an application. It is ideal as an example because it exhibits a high short-term volatility, and several agents devote extensive resources to forecasting its short-term behavior. Thus, precise forecasts made by specialists are available both as a benchmark and as an important candidate regressor for the forecasting models. Furthermore, we combine forecasts based on model confidence sets and show that model combination can achieve superior predictive performances.
Since the mid 1990s, theories of speculative attacks have argued that fixed exchange rate regimes... more Since the mid 1990s, theories of speculative attacks have argued that fixed exchange rate regimes induce excessive borrowing in foreign currency as an optimal response to implicit guarantes that the government will not devalue the domestic currency. Using data on Brazilian firms before and after the end of the fixed exchange rate regime in 1999, we estimate the relevance of the implicit guarantees by comparing the changes in foreign debt of two groups of firms: those that hedged their foreign currency debt prior to the exchange rate float and those that did not. Using the difference-in-differences approach, in which firm-specific characteristics are introduced as control variables, we exclude macroeconomic effects of the change in the exchange rate regime and possible differences in foreign debt trends of the two groups of firms, thus obtaining an estimate of the impact of the implicit guarantees on borrowing in foreign currency. The results suggest that the implicit guarantees do n...
This paper examines the recent evolution of the Brazilian public domestic debt and interprets it ... more This paper examines the recent evolution of the Brazilian public domestic debt and interprets it in light of the confidence crisis literature. The analysis of the recent developments in the Brazilian public domestic debt market shows that the likelihood of a default must not be assessed only using simple summary aggregate measures of public domestic debt size and maturity, but must also consider other structural aspects. Our analysis emphasizes the two main pillars of the Brazilian public domestic debt market: home-bias and the role of the banking sector in intermediating the debt. Evidence from yields of a “perfectly” indexed bond shows that the rollover premium was very small when the devaluation occurred, and is still fairly small by October, 1999, indicating that the rollover of the public domestic debt is not, so far, a serious problem. Positive prospects for the public domestic debt market will depend, however, on the Brazilian government maintaining the current fiscal austeri...
Despite the fall in the interest rate observed in Brazil in recent decades, and specific regulati... more Despite the fall in the interest rate observed in Brazil in recent decades, and specific regulations on the private pension segment that encourage long-term risk taking, institutions in this segment appear to be considerably sensitive to short-term factors, while avoiding exposure to long-term risk factors. With portfolio allocation data from large entities, we implemented a VAR model to evaluate the impact of interest rate changes on portfolio management decisions and performed a counterfactual analysis to define the causal effect of regulation on additional risk taking. Results indicate that interest rate increases lead to significant and persistent reduction of investment in riskier assets with longer maturities, while the implemented regulation was not able to force greater risk-taking by institutions, in addition to generating distortions in segments of the Brazilian financial market.
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