Local Currency Sovereign Risk

71 Pages Posted: 30 May 2017

See all articles by Wenxin Du

Wenxin Du

University of Chicago Booth School of Business

Jesse Schreger

Harvard Business School

Multiple version iconThere are 2 versions of this paper

Date Written: 2013-12-10


Do governments default on debt denominated in their own currency? We introduce a new measure of sovereign credit risk, the local currency credit spread, defined as the spread of local currency bonds over the synthetic local currency risk-free rate constructed using cross currency swaps. We find that local currency credit spreads are positive and sizable. Compared with credit spreads on foreign currency denominated debt, local currency credit spreads have lower means, lower cross-country correlations, and are less sensitive to global risk factors. Global risk aversion and liquidity factors can explain more time variation in these credit spread differentials than macroeconomic fundamentals.

Keywords: Local currency, sovereign debt, currency swaps

JEL Classification: F31, F34, G15

Suggested Citation

Du, Wenxin and Schreger, Jesse, Local Currency Sovereign Risk (2013-12-10). FRB International Finance Discussion Paper No. 1094. Available at SSRN: https://ssrn.com/abstract=2976788

Wenxin Du (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://https://sites.google.com/site/wenxindu/

Jesse Schreger

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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