Working Paper: CEPR ID: DP14986
Authors: Mikhail Chernov; Drew Creal; Peter Hrdahl
Abstract: We study the dynamic properties of sovereign bonds in emerging markets and their associated risk premiums. We focus on the properties of credit spreads, exchange rates, and their interaction. Relying on the term structure of local currency bonds issued by Asia-Pacific sovereigns, we find that local variables are significant in the dynamics of currency and credit risk, and the components of bond risk premiums reflecting these risks. Local currency bonds dramatically improve the investment frontier.
Keywords: emerging bond markets; credit risk; currency risk; twin ds; affine model
JEL Codes: F31; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local credit risk (F34) | local currency depreciation rates (F31) |
| local currency depreciation rates (F31) | local credit spreads (G19) |
| local shocks (F41) | local credit spreads (G19) |
| local shocks (F41) | local currency depreciation rates (F31) |