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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

Abstract: 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)
New Economics Papers: this item is included in nep-upt
Date: 2019-03
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