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

Forecasting Bonds Yields in the Brazilian Fixed Income Market

This paper studies the predictive ability of a variety of models in forecasting the yield curve for the Brazilian fixed income market. We compare affine term structure models with a variation of the Nelson-Siegel exponential framework developed by Diebold and Li (2006). Empirical results suggest that forecasts made with the latter methodology are superior and appear accurate at long horizons when compared to different benchmark forecasts. These results are important for policy makers, portfolio and risk managers. Further research could study the predictive ability of such models in other emerging markets.

Characterizing the Brazilian Term Structure of Interest Rates

This paper studies the Brazilian term structure of interest rates and characterizes how the term premia has changed over time. We employ a Kalman filter approach, which is extended to take into account regime switches and overlapping forecasts errors. Empirical evidence suggests that term premia depends on international global liquidity and domestic factors such as the composition of public debt and inflation volatility. These results provide guidance for the formulation of fiscal and monetary policies.

Evaluation of Default Risk for The Brazilian Banking Sector

This paper employs new methods to measure and monitor risk in the Brazilian banking sector. We prove that the option-based risk measure is negatively sensitive to interest rates. As this is an important issue for emerging market economies, the risk measures are built as deviations from mean. Additionally, the option-based indicator is compared with market-based financial fragility indicators. Results show that these indicators are useful for risk managers and regulators, especially during crisis. Furthermore, option-based methods are preferable to classify banks in periods of high distress, such as the banking crises that occurred in the early nineties in Brazil.

Fluctuation Dynamics in US Interest Rates and the Role of Monetary Policy

This paper presents empirical evidence suggesting that the degree of long-range dependence in interest rates depends on the conduct of monetary policy. We study the term structure of interest rates for the US and find evidence that global Hurst exponents change dramatically according to Chairman Tenure in the Federal Reserve Board and also with changes in the conduct of monetary policy. In the period from 1960's until the monetarist experiment in the beginning of the 1980's interest rates had a significant long-range dependence behavior. However, in the recent period, in the second part of the Volcker tenure and in the Greenspan tenure, interest rates do not present long-range dependence behavior. These empirical findings cast some light on the origins of long-range dependence behavior in financial assets.

Linking Financial and Macroeconomic Factors to Credit Risk Indicators of Brazilian Banks

This study constructs a set of credit risk indicators for 39 Brazilian banks, using the Merton framework and balance sheet information on the banks’ total assets and liabilities. Despite the simplifying assumptions, the methodology captures well several stylized facts in the recent history of Brazil. In particular, it identifies deterioration in the credit risk indicators of the banking sector, following the crisis in the early 2000s. The risk indicators were regressed against a number of macro-financial variables at both individual and systemic level, showing that an increase in the system EDF, interest rates, and CDS spreads will lead to a deterioration of the individual expected default probability.

A Macro Stress Test Model of Credit Risk for the Brazilian Banking Sector

This paper proposes a model to conduct macro stress test of credit risk for the banking system based on scenario analysis. We employ an original bank level data set with disaggregated credit loans for business and consumer loans. The results corroborate the presence of a strong procyclical behavior of credit quality, and show a robust negative relationship between (the logistic transformation of) NPLs and GDP growth, with a lag response up to three quarters. The models also indicate substantial variations in the cyclical behavior of NPLs across credit types. Stress tests suggest that the banking system is well prepared to absorb the credit losses associated with a set of distressed macroeconomic scenarios without threatening financial stability.

Forecasting Exchange Rate Density using Parametric Models: The Case of Brazil

This paper employs a recently developed parametric technique to obtain density forecasts for the Brazilian exchange rate, using the exchange rate options market. Empirical results suggest that the option market contains useful information about future exchange rate density. These results suggests that density forecasts using options markets may add value for portfolio and risk management, and may be useful for financial regulators to assess financial stability.

Profit, Cost and Scale Efficiency for Latin American Banks: Concentration-Performance Relationship

Using a sample of 495 Latin American banks over the period 2001-2008, this paper investigates how bank concentration influences cost and profit efficiency. We calculate scale efficiency to assess whether these banks are close to their optimal size. We find that banks are more inefficient in profits than in costs; concentration impairs cost efficiency; larger banks have higher performance, but this advantage decreases in concentrated markets; private and foreign banks are the most efficient; most banks are operating under increasing returns of scale, which contributes to the discussion on Basel III.