Bond Risk Premia and the Exchange Rate
35 Pages Posted: 19 Mar 2019
Date Written: March 18, 2019
In emerging market economies, currency appreciation goes hand in hand with compressed sovereign bond spreads, even for local currency sovereign bonds. This yield compression comes from a reduction in the credit risk premium. Crucially, the relevant exchange rate involved in yield compression is the bilateral US dollar exchange rate, not the trade-weighted exchange rate. Our findings highlight endogenous co-movement of bond risk premia and exchange rates through the portfolio choice of global investors who evaluate returns in dollar terms.
Keywords: Bond Spread, Capital Flow, Credit Risk, Emerging Market, Exchange Rate
JEL Classification: G12, G15, G23
Suggested Citation: Suggested Citation