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An empirical model of the Brazilian country risk -- an extension of the beta country risk model

2006; Taylor & Francis; Volume: 38; Issue: 11 Linguagem: Inglês

10.1080/00036840500426843

1466-4283

Joaquim Pinto de Andrade, Vladimir Kühl Teles,

Financial Markets and Investment Strategies

This paper develops a statistical model to study the Brazilian country risk using a country beta model in the spirit of Harvey and Zhou (1993 Harvey, CR and Zhou, G. 1993. International asset pricing with alternative distributional specifications. Journal of Empirical Finance, 1: 107–31. [Crossref] , [Google Scholar]), Erb et al. (1996a Erb, CB, Harvey, C and Viskanta, T. 1996a. Political risk, economic risk and financial risk. Financial Analysts Journal, 52: 28–46. [Taylor & Francis Online] , [Google Scholar], b Erb, CB, Harvey, CR and Viskanta, TE. 1996b. Expected returns and volatility in 135 countries. Journal of Portfolio Management, 22: 46–58. [Crossref], [Web of Science ®] , [Google Scholar]) and Gangemi et al. (2000 Gangemi, M, Brooks, R and Faff, R. 2000. Modeling Australia's country risk: a country beta approach,. Journal of Economics and Business, 52: 259–76. [Crossref] , [Google Scholar]). Specifically, the impact of macroeconomic variables is analysed using a time-varying parameter approach. An extension of the original model is applied in order to verify the parameters' stability over time. It is found that monetary policy had a significant and stable impact on Brazil's country risk and international reserves presented a significant impact only during the fixed exchange rate period.