Last updated: 20:50 / Monday, 20 May 2013
Whitepaper Itaú Research Team

Foreign Exchange Market: An Empirical Investigation of the Determinants

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Foreign Exchange Market: An Empirical Investigation of the Determinants
  • Whitepaper by Gabriela Fernandes, Itaú Macro Research Team
  • What are the variables that led the Brazilian Central Bank to intervene in the foreign exchange market?

Abstract - Since the adoption of the floating exchange-rate regime in 1999, the Brazilian Central Bank (BCB) has intervened several times in the foreign exchange market, buying and selling dollars in the spot, futures and derivatives markets. What are the variables that led the central bank to intervene in the foreign exchange market? In our investigation of this question, we find that the behavior of some variables - including, among others, the risk premium, the deviations of the real from its prior trend, comparison of the performance of the real with that of similar currencies, the volatility of markets and of the exchange rate itself - strongly influence the likelihood of BCB intervention in FX. We also conclude that the monetary authority acts in “blocks”, and that the fact that it had intervened the day before increases the likelihood of a new intervention. We also note that the BCB interventions (“reaction function”) change over time, in accordance with different macroeconomic scenarios and administrations.

You may access the Whitepaper through this link.

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