European Business Schools Librarian's Group
IESE Research Papers,
IESE Business School
No D/425: Options-based analysis of emerging market exchange rate expectations: Brazil's real plan, 1994-1999, An
Jose M. Campa (), Kevin Chang and James F. Refalo
Additional contact information
Jose M. Campa: IESE Business School, Postal: IESE Business School. Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Kevin Chang: Credit Suisse First Boston, London
James F. Refalo: New York University
Abstract: This paper uses currency option data from the BMF, the Commodities and Futures exchange in Sao Paulo, Brazil, to investigate market expectations on the Brazilian Real-U.S. dollar exchange rate from October 1994 through March 1999. Using options data, we derive implied probability density functions (PDF) for expected future exchange rates and thus measures of the credibility of the "crawling peg" and target zone ("maxiband") regimes governing the exchange rate. Since we do not impose an exchange rate model, our analysis is based on either the risk-neutral PDF or arbitrage-based tests of target zones. The paper, one of the first to use options data from an emerging market, finds that target zone credibility was poor prior to February 1996, improved afterwards through September 1997 and later started to worsen again. The market anticipated periodic band adjustments, and estimated distributions are very sensitive to political and economic news affecting the credibility of the regime. We also test whether devaluation intensities estimated from these option prices can be explained by standard macroeconomic factors.
Keywords: Exchange rate credibility; implied distributions; options
31 pages, October 20, 2000
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DI-0424-E.pdf
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