IS IT RISK? AN AUTOMATED APPROACH TO EXPLAIN THE EX ANTE DEVIATIONS OF BRAZIL.

The paper tests whether ex ante deviations from Uncovered Interest Rate Parity correspond to default risk premium. Using an automated model selection criteria and data for Brazil (from november 2001 until december 2007), we found that deviations are correlated with a measure of risk (the EMBI+ ). There is also evidence that these deviations can be explained and predicted by a set of fundamentals (such as the current account deficit as a percentage of the GDP and domestic inflation for example). Insofar as some of these variables can be controlled by the government, the results suggest that economic policy is able to decrease risk. [ABSTRACT FROM AUTHOR]