The asymmetry and uncertainty effects on the response of the yield curve to Brazilian monetary policy

Abstract

We investigate the influence of the Central Bank of Brazil’s Monetary Policy Committee (COPOM) decisions on the term structure of interest rate. We consider four possible drivers of market movements: (i) the effective surprise in the decision compared to market expectations; (ii) the asymmetric market responses to positive or negative changes in the monetary policy interest rate; (iii) the influence of economic uncertainty around meetings; and (iv) the effects of these changes on market behavior over time. We find that the monetary surprise coefficients have negative values for long-term rates. Moreover, we find an asymmetric response of the sign of the change in the monetary policy interest rate. There is evidence that, in general, positive changes in the interest rate are more difficult to predict by the market. Higher uncertainty increases the effect of the monetary policy surprise component in the short-term and reduces the effect in the long-term yield rates. Moreover, there is a reduction in the impact of the surprise component on the Brazilian interest rate market over time.