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Do the central bank actions reduce interest rate volatility?

Jaqueline Terra Moura Marins and José Valentim Machado Vicente

Economic Modelling, 2017, vol. 65, issue C, 129-137

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 this decision published one week later. Unlike related papers, we measure the 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 encompass market beliefs adjusted by risk. We use an event study approach to evaluate the impact of CBB actions. The results show that both the decisions about the target rate and the communication event reduce the interest rate volatility.

Keywords: Copom meeting; Uncertainty; Risk-neutral density; Interest rate option (search for similar items in EconPapers)
JEL-codes: E43 E58 G14 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:ecmode:v:65:y:2017:i:c:p:129-137