An Options-Based Analysis of Emerging Market Exchange Rate Expectations: Brazil's Real Plan, 1994-1999

CEMFI Working Paper No. 0006

Posted: 19 May 2000

See all articles by José Manuel Campa

José Manuel Campa

University of Navarra - Madrid Campus - IESE Business School; National Bureau of Economic Research (NBER)

P. H. Kevin Chang

Credit Suisse AG - London Headquarters

James F. Refalo

California State University, Los Angeles

Date Written: April 2000

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.

Suggested Citation

Campa, José Manuel and Chang, P.H. Kevin and Refalo, James F., An Options-Based Analysis of Emerging Market Exchange Rate Expectations: Brazil's Real Plan, 1994-1999 (April 2000). CEMFI Working Paper No. 0006. Available at SSRN: https://ssrn.com/abstract=224071

José Manuel Campa (Contact Author)

University of Navarra - Madrid Campus - IESE Business School ( email )

Camino del Cerro del Aguila 3
Madrid, 28023
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

P.H. Kevin Chang

Credit Suisse AG - London Headquarters ( email )

One Cabot Square
London E14 4QJ
United Kingdom
+44 171 888 8535 (Phone)
+44 171 888 4775 (Fax)

James F. Refalo

California State University, Los Angeles ( email )

Los Angeles, CA
United States

HOME PAGE: http://instructional1.calstatela.edu/jrefalo/

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