Sovereign yields and the risk-taking channel of currency appreciation

Boris Hofmann, Ilhyock Shim and Hyun Song Shin

No 538, BIS Working Papers from Bank for International Settlements

Abstract: Currency appreciation goes hand in hand with easier financial conditions and compressed sovereign bond spreads, even for local currency sovereign bonds. This yield compression comes from a reduction in the credit risk premium. Crucially, the relevant exchange rate involved in yield compression is the bilateral dollar exchange rate, not the trade-weighted exchange rate. Our findings point to a financial risk-taking channel of currency appreciation associated with the global role of the dollar.

Keywords: bond spread; capital flow; credit risk; emerging market; exchange rate (search for similar items in EconPapers)
Pages: 41 pages
Date: 2016-01
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (76)

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