Local currency bond risk premia of emerging markets: The role of local and global factors

Oguzhan Cepni, Selcuk Gul and Rangan Gupta

Finance Research Letters, 2020, vol. 33, issue C

Abstract: This paper investigates the sources of variation in emerging market (EM) local currency bond risk premium. Empirical results suggest that both global and local factors contain valuable information in explaining the local currency bond excess returns. We show that economic policy uncertainty causes the excess bond returns to increase while positive innovations in the term spread, CP factor and implied FX volatility have downward impacts on the excess returns. Besides, the high level of spillover from developed markets to EMs may confine the diversification benefits from holding EM local currency bonds.

Keywords: Local currency bond risk premium; Dynamic factor model; Emerging markets; Panel VAR (search for similar items in EconPapers)
JEL-codes: C55 E44 G15 H63 O16 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Working Paper: Local Currency Bond Risk Premia of Emerging Markets: The Role of Local and Global Factors (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:33:y:2020:i:c:s1544612319300248

DOI: 10.1016/j.frl.2019.05.001

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