Local Currency Bond Risk Premia
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Local Currency Bond Risk Premia
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Author : Oguzhan Cepni
language : en
Publisher:
Release Date : 2019
Local Currency Bond Risk Premia written by Oguzhan Cepni and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
This paper investigates the source of variation in emerging market (EM) local currency bond risk premium by employing panel fixed effects regression model. Moreover, we use the methodology of dynamic factor model for large datasets to investigate the possible linkages between excess bond return and economic activity. We provide evidence that macroeconomic and financial variables contain valuable information in explaining local currency bond excess returns. Additionally, we extend our analysis with a panel threshold estimation to investigate how the influence of different factors may vary in different states of the markets depending on the level of global risk appetite. The results show that investors pay more attention to changes in macroeconomic fundamentals when the global risk aversion is high. Also, the influence of exchange rate volatility is more pronounced during the time of market stress. On the other hand, positive credit rating changes decrease the country risk premium which results in lower bond risk premium in tranquil times. Overall, these findings imply that global investors view the local currency debt market as a separate asset class and explore potential diversification benefit from investing in emerging markets by differentiating meaningfully in terms of macroeconomic and financial fundamentals.
Bond Risk Premia And The Exchange Rate
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Author : Boris Hofmann
language : en
Publisher:
Release Date : 2019
Bond Risk Premia And The Exchange Rate written by Boris Hofmann and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
Sovereign Credit And Exchange Rate Risks
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Author : Mikhail Chernov
language : en
Publisher:
Release Date : 2020
Sovereign Credit And Exchange Rate Risks written by Mikhail Chernov and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2020 with categories.
We study the dynamic properties of sovereign bonds in emerging markets and their associated risk premiums. We focus on the properties of credit spreads, exchange rates, and their interaction. Relying on the term structure of local currency bonds issued by Asia-Pacific sovereigns, we find that local variables are significant in the dynamics of currency and credit risk, and the components of bond risk premiums reflecting these risks. Local currency bonds dramatically improve the investment frontier.
The Term Structure Of Currency Carry Trade Risk Premia
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Author : Hanno Lustig
language : en
Publisher:
Release Date : 2013
The Term Structure Of Currency Carry Trade Risk Premia written by Hanno Lustig and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with Economics categories.
We find that average returns to currency carry trades decrease significantly as the maturity of the foreign bonds increases, because investment currencies tend to have small local bond term premia. The downward term structure of carry trade risk premia is informative about the temporal nature of risks that investors face in currency markets. We show that long-maturity currency risk premia only depend on the domestic and foreign permanent components of the pricing kernels, since transitory currency risk is automatically hedged by interest rate risk for long-maturity bonds. Our findings imply that there is more cross-border sharing of permanent than transitory shocks.
Emerging Market Local Currency Bond Market Too Risky To Invest
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Author : Uğur N. Küçük
language : en
Publisher:
Release Date : 2019
Emerging Market Local Currency Bond Market Too Risky To Invest written by Uğur N. Küçük and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
Over the last decade, local currency emerging market (EM) debt has been developing to become an attractive and complementary investment category as many EM countries have been successful to reduce currency mismatches and maturity problems by implementing sound fiscal and monetary policies. Analyzing the period from 2002 to July 2009, we show that the local currency EM debt investments provide significant additional alpha and diversification to traditional bond portfolios. In particular, first, EM local currency bond returns are less correlated to the US stock market, treasury and high-yield bond markets, and global risk premia compared to the a case of EM equity and US dollar-denominated bond markets. Second, yields and excess returns on local currency debt depend largely on expected depreciation of the exchange rate against US dollar, while excess returns on dollar-denominated EM debt are for the most part compensation for bearing the global risk. Third, EM sovereign local currency bond returns beat other emerging and mature market asset classes by providing higher risk adjusted excess returns and diversification. In light of our findings, we suggest that the development of local currency bond markets in EM countries could contribute to global financial stability by reducing currency mismatches and reliance on foreign currency debt, which in turn is linked to growth and poverty reduction.
The Term Structure Of Currency Carry Trade Risk Premia
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Author : Hanno N. Lustig
language : en
Publisher:
Release Date : 2018
The Term Structure Of Currency Carry Trade Risk Premia written by Hanno N. Lustig and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.
Fixing the investment horizon, the returns to currency carry trades decrease as the maturity of the foreign bonds increases, because the local currency term premia offset the currency risk premia. The time series predictability of foreign bond returns in dollars similarly declines with the bonds' maturities. Leading no-arbitrage models in international finance cannot match the downward term structure of currency carry trade risk premia. To match these findings, we find that long-run U.I.P. has to hold on average in dynamic no-arbitrage asset pricing models.
Analysis Of Bond Risk Premia
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Author : Lukas Wäger
language : en
Publisher:
Release Date : 2012
Analysis Of Bond Risk Premia written by Lukas Wäger and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012 with categories.
The focus of this thesis is on bond return predictability and providing an empirical and economic understanding of bond risk premia. The thesis consists of an empirical analysis of time-varying bond risk premia along three major branches of the current term structure literature, namely yields-only, macro-finance and multi-currency term structure models. All these models belong to the well-known class of affine models introduced by Ang and Piazzesi (2003), whereas the latter two embed unspanned factors. Unspanned factors are state variables that have an effect on bond risk premia but do not span the cross-section of yields, as recently introduced by Duffee (2011), Joslin, Priebsch and Singleton (2011) and Boos (2011). The section concerning yields-only models contributes by providing evidence of three priced risk premia of bonds in the US market, extending the analysis of Cochrane and Piazzesi (2005) and Boos (2011). The section concerning macrofinance models adds to the new branch of models with unspanned macro factors and extends existing research by analyzing the effects of unspanned macro factors on risk premia beyond the level risk premium and extending into a broader and longer data set of macroeconomic variables. The section concerning multi-currency models firstly introduces unspanned factors into international models by taking mutually unspanned latent yield curve factors of domestic and foreign countries as state variables. The information in foreign yield curves is found to be partly unspanned by the domestic yield curve and improves bond return predictability beyond local models.
Sovereign Risk Currency Risk And Corporate Balance Sheets
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Author : Wenxin Du
language : en
Publisher:
Release Date : 2016
Sovereign Risk Currency Risk And Corporate Balance Sheets written by Wenxin Du and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with Debt categories.
Nominal debt provides consumption-smoothing benefits if it can be inflated away during recessions. However, we document empirically that countries with more countercyclical inflation, where nominal debt provides better consumption smoothing, issue more foreign-currency debt. We propose that monetary policy credibility explains the currency composition of sovereign debt and nominal bond risks in the presence of risk-averse investors. In our model, low credibility governments inflate during recessions, generating excessively countercyclical inflation in addition to the standard inflationary bias. With countercyclical inflation, investors require risk premia on nominal debt, making nominal debt issuance costly for low credibility governments. We provide empirical support for this mechanism, showing that countries with higher nominal bond-stock betas have significantly larger nominal bond risk premia and borrow less in local currency.
Fx Risk Premia From The Bond Markets
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Author : Mi Wu
language : en
Publisher:
Release Date : 2018
Fx Risk Premia From The Bond Markets written by Mi Wu and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with Bond market categories.
"This paper proposes a two-country term structure model of joint behavior of bond markets and foreign exchange (FX) markets. With risk factors extracted from local bond markets of G10 currency countries, the term structure model is able to reproduce the uncovered interest parity (UIP) puzzle as observed in the FX market. Bond market risk factors explain up to 50% of the variations in exchange rate movements at a one-year horizon and over 90% for investment currency countries at a five-year horizon. For the three-month currency excess returns, the model-implied time-varying risk premia deliver 46.3%, on average, more explanatory power than the interest rate differentials. The model quantifies the level of integration between the FX market and bond markets. The empirical findings also reveal heterogeneity between investment- and funding-currency countries in terms of the risk exposure to the bond market transitory shocks"--Page vii.
Currency Risk Premia In Global Stock Markets
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Author : Shaun K. Roache
language : en
Publisher:
Release Date : 2006
Currency Risk Premia In Global Stock Markets written by Shaun K. Roache and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006 with Banks and banking, Central categories.