Shock, Communication, and Yield Curve Repricing: A Two-Step Empirical Framework for Copom Events in Brazil

TL;DR

This paper introduces a two-step empirical framework to analyze how shocks and Copom communications influence the Brazilian interest rate curve around policy events, combining textual analysis and market data.

Contribution

It provides a novel, implementable method for decomposing market reactions into shock and communication effects specific to Brazil's monetary policy events.

Findings

Framework is most effective at front and intermediate curve segments.

Baseline models explain up to 43% of variation for DI 252d maturity.

Textual features show plausible signs but have limited statistical robustness.

Abstract

This paper proposes a two-step empirical framework to study the repricing of the Brazilian DI curve around Copom-related events. The empirical strategy separates the initial market reaction associated with the underlying shock from the subsequent repricing observed between the shock and the first Copom statement that follows it. The dataset combines a hand-built event calendar, daily market data, Focus expectations, and structured textual features extracted from Copom statements, including tone, forward-guidance direction and explicitness, and uncertainty indicators. In the updated sample, 59 events retain both analytical windows, allowing the second stage to include the full set of same-day Copom events. Baseline results suggest that the framework is most informative at the front and intermediate sections of the curve, especially for the DI 252d maturity, for which the baseline OLS specification reaches an in-sample R2 of about 0.43. By contrast, explanatory power is materially weaker for the DI 504d maturity and for slope adjustments, and out-of-sample performance remains limited. The textual variables display economically plausible signs, but their statistical contribution is not uniformly robust across specifications. The main contribution of the paper is therefore methodological and applied: it offers an implementable event-based decomposition for assessing how shocks and Copom communication jointly shape curve dynamics in Brazil.