Empirical Evaluation of the Covered Interest Parity between the Brazilian real and the US dollar (2008-2013)

Abstract:

In contradiction to the vast international evidence in favor of the covered interest parity theorem (CIP), the scarce empirical literature that investigated thisrelation in the Brazilian economy does not confirm this condition. This worktests the CIPbetween the Brazilian Real and the American Dollar,in the period 2008 -2013. We star by analyzing specificities of the Brazilian data and the variables used to estimate the parity. We argue that the relevantforeign interest ratevariable to test the CIP in Brazil is that oneavailable to domestic agents, whose proxy is the LIBOR rate plus the Brazilian EMBI+ (the spread between the Brazilian sovereigndebt and the US treasury bonds rate). We then compare this rate with the Brazilian foreign exchange coupon (which is a tautological closure to the covered parity) as an alternative way to evaluate the CIP.

Keywords:
covered interest parity (CIP); foreign exchange coupon