Working Paper: NBER ID: w27500
Authors: Mikhail Chernov; Drew D. 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: Sovereign Credit Risk; Exchange Rate Risk; Local Currency Bonds; Asia-Pacific
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 shocks (F41) | local credit spreads (G19) |
| local variables (C29) | local credit spreads (G19) |
| local variables (C29) | local currency risk (F31) |
| local currency risk (F31) | local credit spreads (G19) |
| local credit factors (G21) | depreciation rate (E43) |
| depreciation rate (E43) | local credit factors (G21) |
| local variables (C29) | variation in local bond risk premiums (H74) |
| local currency bonds (LC bonds) (F34) | investment frontier (G31) |
| twin ds risk premiums (G59) | local currency bonds (LC bonds) (F34) |