Exchange Rates and Sovereign Risk

Pasquale Della Corte (), Lucio Sarno, Maik Schmeling and Christian Wagner ()
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Pasquale Della Corte: Department of Finance, Imperial College London, London SW7 2BX, United Kingdom of Great Britain and Northern Ireland
Christian Wagner: Department of Finance, Accounting and Statistics, WU Vienna University of Economics and Business and Vienna Graduate School of Finance (VGSF), 1020 Vienna, Austria

Management Science, 2022, vol. 68, issue 8, 5591-5617

Abstract: An increase in a country’s sovereign risk, as measured by credit default swap spreads, is accompanied by a contemporaneous depreciation of its currency and an increase of its volatility. The relation between currency excess returns and sovereign risk is mainly driven by default expectations (rather than distress risk premia) and exposure to global sovereign risk shocks and also emerges in a predictive setting for currency risk premia. We show that a sovereign risk factor is priced in the cross-section of currency returns and that it is not subsumed by the carry factor.

Keywords: exchange rates; currency risk premium; currency options; sovereign risk; CDS spreads (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (9)

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http://dx.doi.org/10.1287/mnsc.2021.4115 (application/pdf)

Related works:
Working Paper: Exchange Rates and Sovereign Risk (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:8:p:5591-5617

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