Sovereign Credit and Exchange Rate Risks: Evidence from Asia-Pacific Local Currency Bonds

Posted: 18 Aug 2020

See all articles by Mikhail Chernov

Mikhail Chernov

UCLA Anderson

Drew Creal

University of Notre Dame

Peter Hördahl

Bank for International Settlements (BIS) - BIS Representative Office for Asia and the Pacific

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020

Abstract

We study the dynamic properties of sovereign bonds in emerging markets and their associated risk premiums. We focus on the properties of credit spreads, exchange rates, and their interaction. Relying on the term structure of local currency bonds issued by Asia-Pacific sovereigns, we find that local variables are significant in the dynamics of currency and credit risk, and the components of bond risk premiums reflecting these risks. Local currency bonds dramatically improve the investment frontier.

Keywords: affine model, credit risk, currency risk, emerging bond markets, Twin Ds

JEL Classification: F31, G12, G15

Suggested Citation

Chernov, Mikhail and Creal, Drew and Hoerdahl, Peter, Sovereign Credit and Exchange Rate Risks: Evidence from Asia-Pacific Local Currency Bonds (July 2020). CEPR Discussion Paper No. DP14986, Available at SSRN: https://ssrn.com/abstract=3674870

Mikhail Chernov (Contact Author)

UCLA Anderson ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Drew Creal

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Peter Hoerdahl

Bank for International Settlements (BIS) - BIS Representative Office for Asia and the Pacific ( email )

78th floor, Two International Finance Centre
8 Finance Street, Central
Hong Kong

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