Forecasting Exchange Rate Density Using Parametric Models: the Case of Brazil

Abstract

This paper employs a recently developed parametric technique to obtain density forecasts for the Brazilian exchange rate, using the exchange rate options market. Empirical results suggest that the option market contains useful information about future exchange rate density. These results suggests that density forecasts using options markets may add value for portfolio and risk management, and may be useful for financial regulators to assess financial stability.

Keywords

• Density forecasting
• emerging market
• exchange rate
• options market