Sovereign Risk and Out-of-Equilibrium Exchange Rate Dynamics

Abstract

We show that the sovereign risk premium contains important information on short-run exchange rate dynamics in emerging economies. Net foreign assets serve as the key link between both variables, which acts as a "crude form of collateral." We present two sets of empirical evidence. First, we show that increases in net foreign assets provide a statistically significant reduction on emerging markets sovereign risk premium. Then, we show that out-of-sample forecasts using realized values for the sovereign risk premium have a satisfactory performance when evaluated across three metrics: the mean squared error ratio, the direction of change statistic, and the consistency criterion. Copyright (C) 2010 Blackwell Publishing Ltd.

Capital controls and optimal Chinese monetary policy

“…Thus, Ω b is set at a greater value of 0.6 to capture 11 In keeping with poor empirical performances of UIP-related conditions in the literature, this coefficient was marginally significant at the 15 percent level. However, Carneiro and Wu (2010) provide evidence that UIP-based exchange rate conditions hold at statistically significant levels for samples of emerging market economies.…”

Capital Controls and Optimal Chinese Monetary Policy

“…In keeping with poor empirical performances of UIP-related conditions in the literature, this coefficient was marginally significant at the 15 percent level. However,Carneiro and Wu (2010) provide evidence that UIP-based exchange rate conditions hold at statistically significant levels for samples of emerging market economies.…”