Identification and Testing of a Term Structure Relationship for Country and Currency Risk Premia in an Emerging Market

Posted: 16 Jan 1997

See all articles by Ian Domowitz

Ian Domowitz

ITG, Inc.; National Bureau of Economic Research (NBER)

Jack D. Glen

International Finance Corporation (IFC)

Ananth Madhavan

BlackRock, Inc.

Date Written: August 1996

Abstract

This paper uses a term structure of Mexican sovereign debt to create measures of country and currency risk premia. We use these measures to test hypothesis about investors' expectations regarding these risks and their relationship to volatility in securities markets. In the period 1993-94, the behavior of these two risk premia are markedly different. Interestingly, the currency premium is considerably larger and more volatile than its country risk counterpart. We find that increases in stock return volatility translate into increases in the premium demanded by investors with respect to currency and country factors. Investors appear to have long memories, in that the premia are more persistent than equity market volatility shocks.

JEL Classification: F31, G15, O54

Suggested Citation

Domowitz, Ian H. and Glen, Jack Dean and Madhavan, Ananth, Identification and Testing of a Term Structure Relationship for Country and Currency Risk Premia in an Emerging Market (August 1996). Available at SSRN: https://ssrn.com/abstract=9505

Ian H. Domowitz

ITG, Inc. ( email )

380 Madison Avenue, 4th Floor
Electronic Market Initiatives
New York, NY 10017
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jack Dean Glen (Contact Author)

International Finance Corporation (IFC) ( email )

2121 Pennsylvania Avenue, NW
Washington, DC 20433
United States
202-473-8641 (Phone)

Ananth Madhavan

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

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