Sovereign credit and exchange rate risks: Evidence from Asia-Pacific local currency bonds

Chernov, Mikhail; Creal, Drew; Hördahl, Peter

doi:10.1016/j.jinteco.2022.103692

Cited by 6 publications

(1 citation statement)

References 43 publications

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“…Daniel, Hodrick, and Lu (2017) offer compelling arguments for exclusion of emerging currencies and the European currencies other than the EUR. In particular, emerging currencies reflect credit risk of the respective sovereigns, and thus, the economic composition of the associated currency risk premiums is different (see, e.g., Na et al (2018), Chernov, Creal, andHördahl (2020)).…”

Section: A Datamentioning

confidence: 99%

Pricing Currency Risks

Chernov¹,

Dahlquist²,

Lochstoer³

2022

The Journal of Finance

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The currency market features a small cross-section, and conditional expected returns can be characterized by few signals: interest differential, trend, and mean reversion. We exploit these properties to construct the ex ante mean-variance efficient portfolio of individual currencies. The portfolio is updated in real time and prices all prominent currency trading strategies, conditionally and unconditionally. The fraction of risk in these assets that does not affect their risk premiums is at least 85%. Extant explanations of carry strategies based on intermediary capital or global volatility are related to these unpriced components, while consumption growth is related to the priced component of returns.

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Section: A Datamentioning

confidence: 99%

Pricing Currency Risks

Chernov¹,

Dahlquist²,

Lochstoer³

2022

The Journal of Finance

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Term spread spillovers to Latin America and emergence of the ‘Twin Ds’

Giraldo,

Gomez-Gonzalez

et al. 2024

International Review of Economics & Finance

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Bond yield spreads and exchange market pressure in emerging countries

Ozcelebi,

Perez-Montiel,

Manera

2024

IJOEM

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PurposeMight the impact of the financial stress on exchange markets be asymmetric and exposed to regime changes? Departing from the existing literature, highlighting that the domestic and foreign financial stress in terms of money market have substantial effects on exchange market, this paper aims to investigate the impacts of the bond yield spreads of three emerging countries (Mexico, Russia, and South Korea) on their exchange market pressure indices using monthly observations for the period 2010:01–2019:12. Additionally, the paper analyses the impact of bond yield spread of the US on the exchange market pressure indices of the three mentioned emerging countries. The authors hypothesized whether the negative and positive changes in the bond yield spreads have varying effects on exchange market pressure indices.Design/methodology/approachTo address the research question, we measure the bond yield spread of the selected countries by using the interest rate spread between 10-year and 3-month treasury bills. At the same time, the exchange market pressure index is proxied by the index introduced by Desai et al. (2017). We base the empirical analysis on nonlinear vector autoregression (VAR) models and an asymmetric quantile-based approach.FindingsThe results of the impulse response functions indicate that increases/decreases in the bond yield spreads of Mexico, Russia and South Korea raise/lower their exchange market pressure, and the effects of shocks in the bond yield spreads of the US also lead to depreciation/appreciation pressures in the local currencies of the emerging countries. The quantile connectedness analysis, which allows for the role of regimes, reveals that the weights of the domestic and foreign bond yield spread in explaining variations of exchange market pressure indices are higher when exchange market pressure indices are not in a normal regime, indicating the role of extreme development conditions in the exchange market. The quantile regression model underlines that an increase in the domestic bond yield spread leads to a rise in its exchange market pressure index during all exchange market pressure periods in Mexico, and the relevant effects are valid during periods of high exchange market pressure in Russia. Our results also show that Russia differs from Mexico and South Korea in terms of the factors influencing the demand for domestic currency, and we have demonstrated the role of domestic macroeconomic and financial conditions in surpassing the effects of US financial stress. More specifically, the impacts of the domestic and foreign financial stress vary across regimes and are asymmetric.Originality/valueThis study enriches the literature on factors affecting the exchange market pressure of emerging countries. The results have significant economic implications for policymakers, indicating that the exchange market pressure index may trigger a financial crisis and economic recession.

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Sovereign credit and exchange rate risks: Evidence from Asia-Pacific local currency bonds

Cited by 6 publications

References 43 publications

Pricing Currency Risks

Pricing Currency Risks

Term spread spillovers to Latin America and emergence of the ‘Twin Ds’

Bond yield spreads and exchange market pressure in emerging countries

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