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Title: Sovereign credit and exchange rate risks: Evidence from Asia-Pacific local currency bonds

Author(s): Mikhail Chernov, Drew Creal and Peter Hördahl

Publication Date: July 2020

Keyword(s): affine model, credit risk, currency risk, emerging bond markets and Twin Ds

Programme Area(s): Financial Economics and International Macroeconomics and Finance

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.

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Bibliographic Reference

Chernov, M, Creal, D and Hördahl, P. 2020. 'Sovereign credit and exchange rate risks: Evidence from Asia-Pacific local currency bonds'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14986