THE DYNAMIC HEDGING EFFECTIVENESS FOR SOYBEAN FARMERS OF MATO GROSSO WITH FUTURES CONTRACTS OF BM&F

Dynamic hedging effectiveness for soybean farmers in Rondonópolis (MT) with futures contracts of BM&F is calculated through optimal hedge determination, using the bivariate GARCH BEKK model, which considers the conditional correlations of the prices series, comparing the results with the minimum variance model effectiveness, calculated by OLS, the unhedged and the naïve hedge positions. The financial effectiveness of the dynamic hedge model is superior and can be used by farmers for several decision making purposes such as price discovery, hedging calibration, cash flow projections, market timing, among others.dynamic hedge, minimum variance, soybeans, Mato Grosso, Agribusiness, Agricultural Finance, Industrial Organization,

OPTIMAL INTERNATIONAL RESERVES HOLDINGS IN EMERGING MARKETS ECONOMIES: THE BRAZILIAN CASE

This paper discusses the optimal international reserves holding for Brazilian economy. The optimal is determined with the buffer stock (inventory) model, using a time series approach. This paper differs from traditional approaches that run cross-section analysis. We evaluate Brazilian's reserves holdings with the model and discuss the role of IMF accord in the reserves holdings. The paper also presents evidence to support the idea of fewer needs to hold international reserves in a floating foreign exchange rate regime than in a fixed one. Conclusions highlight that Brazilians' foreign reserves are slightly above the optimal level and the model may allow the country to evaluate the needs of IMF accord renew.

Exchange Volatility and Risk Premium

This paper empirically evaluates the importance of exchange rate regimes and exchange rate volatility on interest rate differentials, with special reference to Chile. We estimate risk-premia for 16 country experiences with different exchange rate regimes and then investigate whether these premia vary with volatility and the regime flexibility. When we assume that any diversifiable risk is actually traded and estimate a CAPM model augmented by taxes, we find a systematic but small relation between exchange rate volatility and risk-premium. In the case of Chile we do not find any significant impact of changes in exchange rate volatility on CAPM-estimated risk-premium. However, when we consider the overall effect of volatility on risk-premium and estimate an ARCH-M model we find a large effect of volatility on risk-premium in this country. In this set-up, when we analyze the cross-country experience, we do not find any relation between regime flexibility and risk-premium.

Interdependence and Contagion: an Analysis of Information Transmission in Latin America's Stock Markets

This paper brings evidences about the hypotheses of financial crisis contagion over Latin American stock markets in the 90's using a multivariate GARCH model. Beside the traditional volatility structure, we added a leverage term like GJR framework in order to avoid problems due to the use of conditional correlation as a measure of relationship between stock markets. The results show the existence of contagion only during the Asian (1997) and the Russian (1998) crises. The consequences of the Brazilian crisis (1999) can be identified as a result of interdependence among Latin American markets, while the crises of Mexico (1994) and Argentina (2001) show a specific mechanism of propagation. This result raises questions about the "contagion" and "interdependence" concepts' adequacy for the analysis of information transmission among stock markets.

Volatility in EMU sovereign bond yields: Permanent and transitory components

This paper explores the evolving relationship in the volatility of sovereign yields in the European Economic and Monetary Union (EMU). To that end, we examine the behaviour for daily yields for 11 EMU countries (EMU-11), during the 2001-2010 period. In a first step, we decompose volatility in permanent and transitory components using Engel and Lee (1999)´s component-GARCH model. Results suggest that transitory shifts in debt market sentiment tend to be less important determinants of bond-yield volatility than shocks to the underlying fundamentals. In a second step, we develop a correlation and causality analysis that indicates the existence of two different groups of countries closed linked: core EMU countries and peripheral EMU countries. Finally, in a third step, we make a cluster analysis that further supports our results regarding the existence of two different groups of countries, with different positions regarding the stability of public finance.Este artículo explora la cambiante volatilidad de los rendimientos de la deuda soberana en la Unión Económica y Monetaria (UEM). Para ello, se examina el comportamiento de los rendimientos diarios de 11 países de la UEM (UEM-11), durante el período 2001-2010. En un primer paso, descomponemos la volatilidad de los componentes permanentes y transitorios utilizando el modelo GARCH de componentes propuesto por Engel y Lee (1999). Nuestros resultados sugieren que los componentes transitorios, relacionados con la percepción del mercado, tienden a ser menos importantes en la explicación de la volatilidad o riesgo de los bonos que las perturbaciones registradas en las variables macroeconómicas subyacentes. En un segundo paso, se desarrolla un análisis de correlación y causalidad que indica la existencia de dos grupos diferentes de países estrechamente relacionados: los países que conforman el núcleo de la UEM y los países periféricos de la UEM. Por último, en una tercera etapa, se realiza un análisis cluster que respalda nuestros resultados sobre la existencia de dos grupos diferentes de países, con distintas posiciones respecto a la estabilidad de las finanzas públicas.Conditional variance, Component model, Cluster analysis, Sovereign bond yields, Economic and Monetary Union, Varianza condicional, El modelo de componentes, Análisis de conglomerados, Los rendimientos de los bonos soberanos, Unión Económica y Monetaria.

Multivariate Gram-Charlier Densities

This paper introduces a new family of multivariate distributions based on Gram-Charlier and Edgeworth expansions. This family encompasses many of the univariate seminonparametric densities proposed in the financial econometrics as marginal distributions of the different formulations. Within this family, we focus on the specifications that guarantee positivity so obtaining a well-defined multivariate density. We compare different "positive" multivariate distributions of the family with the multivariate Edgeworth-Sargan, Normal and Student’s t in an in- and out-sample framework for financial returns data. Our results show that the proposed specifications provide a quite reasonably good performance being so of interest for applications involving the modelling and forecasting of heavy-tailed distributions.Multivariate distributions; Gram-Charlier and Edgeworth-Sargan densities; MGARCH models; financial data

Evaluating Value-at-Risk Models via Quantile Regressions

We propose an alternative backtest to evaluate the performance of Value-at-Risk (VaR) models. The presented methodology allows us to directly test the performance of many competing VaR models, as well as identify periods of an increased risk exposure based on a quantile regression model (Koenker & Xiao, 2002). Quantile regressions provide us an appropriate environment to investigate VaR models, since they can naturally be viewed as a conditional quantile function of a given return series. A Monte Carlo simulation is presented, revealing that our proposed test might exhibit more power in comparison to other backtests presented in the literature. Finally, an empirical exercise is conducted for daily S&P500 return series in order to explore the practical relevance of our methodology by evaluating five competing VaRs through four different backtests.

Modelling the Density of Inflation Using Autoregressive Conditional Heteroscedasticity, Skewness, and Kurtosis Models

The paper aimed at modelling the density of inflation based on time-varying conditional variance, skewness and kurtosis model developed by Leon, Rubio, and Serna (2005) who model higher-order moments as GARCH-type processes by applying a Gram-Charlier series expansion of the normal density function. Additionally, it extended their work by allowing both conditional skewness and kurtosis to have an asymmetry term. The results revealed the significant persistence in conditional variance, skewness and kurtosis which indicate high asymmetry of inflation. Additionally, diagnostic tests reveal that models with nonconstant volatility, skewness and kurtosis are superior to models that keep them invariant.inflation targeting, conditional volatility, skewness and kurtosis, modelling uncertainty of inflation

The Dynamic Relationship between Stock Prices and Exchange Rates: evidence for Brazil

This paper studies the dynamic relationship between stock prices and exchange rates in the Brazilian economy. We use recently developed unit root and cointegration tests, which allow endogenous breaks, to test for a long run relationship between these variables. We performed linear, and nonlinear causality tests after considering both volatility and linear dependence. We found that there is no long-run relationship, but there is linear Granger causality from stock prices to exchange rates, in line with the portfolio approach: stock prices lead exchange rates with a negative correlation. Furthermore, we found evidence of nonlinear Granger causality from exchange rates to stock prices, in line with the traditional approach: exchange rates lead stock prices. We believe these findings have practical applications for international investors

The Theory of Storage and Price Dynamics of Agricultural Commodity Futures: the Case of Corn and Wheat

Using a restricted version of the BEKK model it is tested an implication of the theory of storage that supply-and-demand fundamentals affect the price dynamics of agricultural commodities. The commodities under analysis are corn and wheat. An interest-storage-adjusted-spread was used as a proxy variable for supply-and-demand fundamentals to test the aforementioned implication for both commodities. It is also tested the Samuelson hypothesis that spot prices have higher volatility than futures prices. It is found that the interest-storage-adjusted-spread has had a statistically significant positive influence on the spot and futures returns for both commodities. Likewise, the results also show that spot price returns have higher volatility compared to futures price returns which is consistent with the Samuelson hypothesis. The results of the aforementioned tests are consistent with both theories and with the existing literature related to commodity futures.Agricultural commodities, BEKK model, multivariate GARCH, Samuelson hypothesis, theory of storage