Do Dollar-Denominated Emerging Market Corporate Bonds Insure Foreign Exchange Risk?

44 Pages Posted: 10 Jun 2015

See all articles by Stefanos Delikouras

Stefanos Delikouras

University of Miami - Department of Finance

Robert F. Dittmar

University of Michigan, Stephen M. Ross School of Business

Haitao Li

Cheung Kong Graduate School of Business

Date Written: June 9, 2015

Abstract

Dollar-denominated emerging market debt is marketed to investors as a way of exposing investors emerging market fixed income securities without exposure to exchange rate risk. However, the development literature suggests that dollarization of debt leads to increased probability of financial distress, which would indirectly expose these securities to exchange rate risk. We empirically examine the exposure of dollar-denominated corporate bonds to exchange rate risk in 14 emerging markets. We find that nearly three-fourths of bonds have yield spreads with statistically significant exposure to innovations in exchange rates, exchange rate volatility, or both. In a reduced-form bond pricing model with default risk, we find economically significant exposures of credit spreads to exchange rates and exchange rate volatility.

Keywords: Emerging Market Debt, Default Risk, Exchange Rate Risk

JEL Classification: G12, G15, F31, O16

Suggested Citation

Delikouras, Stefanos and Dittmar, Robert F. and Li, Haitao, Do Dollar-Denominated Emerging Market Corporate Bonds Insure Foreign Exchange Risk? (June 9, 2015). Available at SSRN: https://ssrn.com/abstract=2616265 or http://dx.doi.org/10.2139/ssrn.2616265

Stefanos Delikouras

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Robert F. Dittmar (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Haitao Li

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

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