Brazilian Real Vulnerable to Devaluation Due to Currency Peg Instability
The article analyzes how likely and how big a currency devaluation in Brazil was before the end of the pegged exchange rate system. The researchers used a model to predict when the peg would be abandoned based on currency overvaluation hitting a certain threshold. By looking at exchange rate options data, they found that the probability and expected size of a devaluation of the Brazilian Real matched the model's predictions.