Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/121622
Authors: 
Santos, Francisco Eduardo de Luna Almeida
Garcia, Márcio Gomes Pinto
Medeiros, Marcelo Cunha
Year of Publication: 
2014
Series/Report no.: 
Texto para Discussão, Instituto de Pesquisa Econômica Aplicada (IPEA) 1976
Abstract (Translated): 
This study aims to analyze price discovery in the foreign exchange market in Brazil and indicate which market (spot or futures) adjusts more quickly to the arrival of new information. Using high frequency data from January/2008 to June/2013, we estimate the following price discovery metrics: Information Share (IS), Component Share (CS) and Price Discovery Efficiency Loss (PDEL). We find that futures market dominates price discovery since it responds for 66.2% of the variation in the fundamental price shock and for 97.4% of the fundamental price composition. In a dynamic perspective, futures market is also more efficient since, when markets are subjected to a shock in the fundamental price, it is faster to recover to equilibrium. We also investigated whether results are robust to sub-samples. When we break in sub-samples by semester, price discovery figures confirm futures dominance in all sub-samples. Spot market offer-demand disequilibrium, central bank interventions and external institutional investors' pressure in the futures market emerge as potential explanatory factors to the variation in price discovery metrics between semesters.
Subjects: 
price discovery
high frequency data
foreign exchange market
JEL: 
E32
R38
Document Type: 
Working Paper

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