DP14986 Sovereign credit and exchange rate risks: Evidence from Asia-Pacific local currency bonds

Author(s): Mikhail Chernov, Drew Creal, Peter Hördahl
Publication Date: July 2020
Keyword(s): affine model, credit risk, currency risk, emerging bond markets, Twin Ds
JEL(s): F31, G12, G15
Programme Areas: Financial Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14986

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.