The purpose of this paper is to consider a monetary-jump model to measure the contribution of jumps to the total volatility of interest rates in the Brazilian interbank market and to assess the extent to which the central bank’s unanticipated monetary policy decisions are driving these jumps.
The authors use a sample of swap rates contracts with different maturities to estimate a mixture GARCH-jump model that disentangles two components of interest rate volatility: a GARCH-type specification that models conditional heteroskedasticity to account for the volatility during “normal” times and a Poisson process that models the occurrence of abrupt changes in interest rates.
The contribution of jumps to the total volatility is substantial, and monetary policy decisions partly explain the occurrence of those jumps. In particular, the authors find that the likelihood of a jump occurring during a meeting day of the Brazilian central bank’s monetary policy committee (COPOM) is higher in comparison to that of a non-meeting day.
The occurrence of jumps in the term structure of interest rates raises the question of the transmission mechanism of the monetary policy through the asset price channel as well as the relation between jumps and economic fundamentals.
Communication between the central bank and the market will affect expectations and asset values. If the central bank’s decisions generate fewer jumps, then the variance of the interest rate-linked asset values will also be reduced.
The paper employs a new approach to assess monetary policy surprises to a set of Brazilian interest rate data and relates the occurrence of jumps to the macroeconomic environment.
André A.P. Santos acknowledges financial support of the Brazilian Ministry of Education through Grants CNPq 406493/2012-0, CNPq 408723/2013-0, and CNPq 307320/2013-8.
Meurer, R., Santos, A. and Turatti, D. (2015), "Monetary policy surprises and jumps in interest rates: evidence from Brazil", Journal of Economic Studies, Vol. 42 No. 5, pp. 893-907. https://doi.org/10.1108/JES-07-2014-0113Download as .RIS
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