VOLATILITY OF FINANCIAL FLOWS IN BRAZIL: AN EMPIRICAL ANALYSIS THROUGH THE ARCH MODEL (AUTORREGRESSIVE CONDITIONAL HETEROSKEDASTIC MODEL)

Abstract

The aim of this paper is to measure the financial account volatility of the Brazilian Balance of Payments. We intend to show that the short run capital flows toward Brazil are strongly characterized by speculative movements, which generate macroeconomic effects, such as the negative impact on the domestic interest rate, the public debt and the country risk. The main argument here is that the volatility remains even after a flexible exchange rate regime. In order to accomplish this objective we will use a specific econometric model for time series, the ARCH model (autoregressive conditional heteroskedascity model). Through the analysis that links the annual volatility average and the relative participation of each sub-account in the financial account of superior hierarchy, the paper concludes that the most volatile accounts are just that ones with most speculative and short term bias.