Sovereign Risk and Out-of-Equilibrium Exchange Rate Dynamics
Dionísio Dias Carneiro
affiliation not provided to SSRN
University of California, Santa Cruz - Department of Economics
Review of Development Economics, Vol. 14, No. 4, pp. 699-711, November 2010
We show that the sovereign risk premium contains important information on short-run exchange rate dynamics in emerging economies. Net foreign assets serve as the key link between both variables, which acts as a “crude form of collateral.” We present two sets of empirical evidence. First, we show that increases in net foreign assets provide a statistically significant reduction on emerging markets sovereign risk premium. Then, we show that out-of-sample forecasts using realized values for the sovereign risk premium have a satisfactory performance when evaluated across three metrics: the mean squared error ratio, the direction of change statistic, and the consistency criterion.
Number of Pages in PDF File: 13Accepted Paper Series
Date posted: October 25, 2010
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