Brazilian sovereign risk, international crises and foreign portfolio investment flows

  • Antônio André Cunha Callado Universidade Federal Rural de Pernambuco
  • Horst Dieter Moller Universidade Federal Rural de Pernambuco
Keywords: Sovereign Risk, International Capital Flows, Portfolio Investment

Abstract

The objective of this paper is to describe the behavior of Brazilian sovereign risk from 1995 to 2005 and evaluate the influence of international financial crises on the Brazilian sovereign risk in this period. The influence of international financial crises on the sovereign risk is analysed by econometric methods. The sovereign risk can econometrically be modelled ad hoc by regressing on explaining variables like the IBOVESPA, the short-term interest rate SELIC, the Brazilian international reserves, the exchange rate to the US$ and the foreign portfolio investment flows in equity and fixed income. The first four variables are used to construct an exchange market pressure index to identify and measure periods of international financial crises and model their influence on the sovereign risk. Another model explains changes in the sovereign risk by the exchange market pressure index and the foreign portfolio investment flows equity and does fairly well in a dynamic forecast for the dependent variable Brazilian sovereign risk. Monthly data were used with the Granger causality test to identify lead/lag relations. The results show that the market variables are determined simultaneously, while the SELIC rate reacts with a certain short lag, showing that monetary policy reacts to the financial crises more than anticipates them. The Granger causality test was used also for daily data with the same result.

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Published
2009-06-01
How to Cite
Callado, A., & Moller, H. (2009). Brazilian sovereign risk, international crises and foreign portfolio investment flows . REGE Revista De Gestão, 16(2), 51-71. https://doi.org/10.5700/issn.2177-8736.rege.2009.36669
Section
Finanças