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

44 Pages Posted: 10 Jun 2015 Last revised: 12 Jul 2019

See all articles by Stefanos Delikouras

Stefanos Delikouras

University of Miami - Department of Finance

Robert F. Dittmar

Rice University

Haitao Li

Cheung Kong Graduate School of Business

Date Written: January 27, 2019

Abstract

Dollar-denominated emerging market bonds are marketed to investors as a vehicle for gaining exposure to emerging fixed income markets while avoiding exposure to currency 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? (January 27, 2019). 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)

Rice University ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
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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