Economics at your fingertips  

Local currency systemic risk

Nicola Borri

Emerging Markets Review, 2018, vol. 34, issue C, 111-123

Abstract: Emerging country governments increasingly issue local currency denominated bonds and foreign investors have been increasing their holdings of these assets. By issuing debt denominated in local currency, emerging country governments eliminate exchange rate risk. The growing stock of local currency government debt in the financial portfolios of foreign investors increases their diversification and exposure to fast growing economies. In this paper, we highlight some of the risks associated to this recent trend. First, we adopt the CoV aR risk-measure to estimate the vulnerability of individual countries to systemic risk in the market for local currency government debt. Second, we show that our country-level estimates of vulnerability increase with the share of local currency debt held by foreign investors. A version of the old adage “When New York sneezes, London catches a cold,” used often to describe the relationship between the stock markets in these two cities, still applies between individual emerging countries and the aggregate market for local currency government debt.

Keywords: CoVaR; Emerging markets; Local currency debt; Contagion; Systemic risk (search for similar items in EconPapers)
JEL-codes: C58 F21 F34 G11 G15 G32 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.ememar.2017.11.003

Access Statistics for this article

Emerging Markets Review is currently edited by Jonathan A. Batten

More articles in Emerging Markets Review from Elsevier
Bibliographic data for series maintained by Nithya Sathishkumar ().

Page updated 2021-04-06
Handle: RePEc:eee:ememar:v:34:y:2018:i:c:p:111-123