Hedging the Brazilian stock index in the era of low interest rates: What has changed?

Authors

  • Fernando Antonio Lucena Aiube State University of Rio de Janeiro
  • Winicius Botelho Faquieri State University of Rio de Janeiro

DOI:

https://doi.org/10.12660/rbfin.v18n3.2020.81625

Keywords:

Hedging equities, MGARCH models, Brazilian stock market

Abstract

In this paper we analyze the ability of different asset classes to hedge the Brazilian stock index in periods of high and low interest rates in the Brazilian economy, using two multivariate GARCH models. Our analysis includes two categories of assets: those traded in domestic currency and those traded in U.S. dollars. From the perspective of a local investor, we find that the exchange rate (R$/US$) and gold are the assets least correlated with equities. From the standpoint of a foreign investor, commodity index and fixed-income assets are the most useful. These results prevail in the low- and high-interest-rate periods. Moreover, in the period of low interest rates, the standard deviation of the estimated conditional correlation time series decreases, suggesting that in this period investors are more confident about macroeconomic policies.

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Published

09/05/2020