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Cousin Risks: The Extent and the Causes of Positive Correlation between Country and Currency Risks

Marcio Garcia () and Alexandre Lowenkron

No 68, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: If country and currency risk premiums are positively correlated, a negative international liquidity shock harms twice the economy, thereby substantially increasing interest rates. This harmful positive correlation between country and currency risk premiums observed in some countries is called cousin risks. We, first, identify the extent of this phenomenon by separating a sample of countries into two groups: the one where the positive correlation is observed and the one where it is not. Based on this taxonomy, we investigate the determinants of the cousin risks. Results indicate that currency mismatch and low financial deepening are strongly associated with the phenomenon

Keywords: Country Risk; Currency Risk; Cousin Risks (search for similar items in EconPapers)
JEL-codes: E43 G15 F34 (search for similar items in EconPapers)
Date: 2004-08-11
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Working Paper: Cousin risks: the extent and the causes of positive correlation between country and currency risks (2005) Downloads
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