Do Central Bank Actions Reduce Interest Rate Volatility?

Jaqueline Marins and José Vicente

No 468, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This paper investigates how Central Bank of Brazil (CBB) actions influence market uncertainty. We consider two kinds of actions: the monetary policy decision about the interest rate target and the pure communication event of minutes release one week later. Unlike related papers, we measure market uncertainty by the implied volatility extracted from interest rate options. Implied volatility is more suitable than physical volatility to assess economic effects since it encompasses market beliefs adjusted by risk. We use an event study approach to evaluate the impact of CBB actions. The results show that both decisions about the target rate and communication event reduce interest rate volatility.

Date: 2017-11
New Economics Papers: this item is included in nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bcb:wpaper:468

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