Exchange rate dynamics and US dollar-denominated sovereign bond prices in emerging markets
Chi-Fai Lo and
The North American Journal of Economics and Finance, 2018, vol. 44, issue C, 109-128
Using data on Brazil, Colombia, Mexico, the Philippines, Russia and Turkey, our empirical results show that the exchange rates of their currencies have adequate explanatory power in explaining their US dollar-denominated sovereign bonds, particularly in the post-global financial crisis period. We develop a two-factor pricing model with closed-form solutions for the sovereign bonds in which the correlated factors are foreign exchange rates and US risk-free interest rates that follow a double square-root process relevant in the low interest rate environment. The numerical results and associated error analysis show that the model credit spreads can broadly track the market credit spreads.
Keywords: Sovereign risk; Bond pricing model; Exchange rates; Emerging markets; US interest rates (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:44:y:2018:i:c:p:109-128
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