Bond risk premia and the exchange rate
Boris Hofmann (),
Ilhyock Shim and
Hyun Song Shin
No 775, BIS Working Papers from Bank for International Settlements
In emerging market economies, currency appreciation goes hand in hand with 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 US dollar exchange rate, not the trade-weighted exchange rate. Our findings highlight endogenous co-movement of bond risk premia and exchange rates through the portfolio choice of global investors who evaluate returns in dollar terms.
Keywords: bond spread; capital flow; credit risk; emerging market; exchange rate (search for similar items in EconPapers)
JEL-codes: G12 G15 G23 (search for similar items in EconPapers)
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