Local currency bond risk premia: A panel evidence on emerging markets

Oguzhan Cepni and I.Ethem Güney

Emerging Markets Review, 2019, vol. 38, issue C, 182-196

Abstract: This paper investigates the sources of variation in emerging market (EM) local currency bond risk premium. We find that macroeconomic and financial variables contain valuable information in explaining local currency bond excess returns. Additionally, we extend our analysis to investigate how the influence of different factors change depending on the level of global risk appetite. Although macro fundamentals have an important role in explaining the risk premiums during tranquil times, investors pay less attention to changes in inflation forecast in times of high risk aversion. Positive credit rating changes decrease the bond risk premium in both regimes with a different magnitude. Also, the influence of exchange rate volatility is more pronounced during the time of market stress.

Keywords: Local currency bond risk premium; Dynamic factor model; Emerging markets; Panel regression (search for similar items in EconPapers)
JEL-codes: C55 E44 G15 H63 O16 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:38:y:2019:i:c:p:182-196

DOI: 10.1016/j.ememar.2019.01.002

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