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http://ssrn.com/abstract=884816
 
 

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Efficient Arbitrage Under Financial Indexation: The Case of Chile


Enrique G. Mendoza


University of Pennsylvania; National Bureau of Economic Research (NBER)

May 1991

IMF Working Paper No. 91/49

Abstract:     
Legal restrictions governing financial transactions in Chile have produced a system in which most financial assets are either 30-day non-indexed assets or 90-day indexed assets. This paper analyzes data on the rates of return of these assets to determine the extent to which efficient arbitrage takes place under conditions of partial financial indexation. The data cannot reject the joint hypothesis that participants in financial markets formulate their expectations rationally and that these markets operate efficiently. The data also shows that the indexed/non-indexed interest spread is an accurate predictor of future changes in inflation. The significant implications of these findings for the conduct of monetary policy are also discussed in some detail.

Number of Pages in PDF File: 36

JEL Classification: E44, E43, E52

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Date posted: February 15, 2006  

Suggested Citation

Mendoza, Enrique G., Efficient Arbitrage Under Financial Indexation: The Case of Chile (May 1991). IMF Working Paper, Vol. , pp. 1-36, 1991. Available at SSRN: http://ssrn.com/abstract=884816

Contact Information

Enrique G. Mendoza (Contact Author)
University of Pennsylvania ( email )
Philadelphia, PA 19104
United States
HOME PAGE: http://www.sas.upenn.edu/~egme/index.html
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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