Premium
Bond Risk Premia and The Exchange Rate
Author(s) -
HOFMANN BORIS,
SHIM ILHYOCK,
SHIN HYUN SONG
Publication year - 2020
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12760
Subject(s) - exchange rate , bond , risk premium , monetary economics , liberian dollar , portfolio , economics , foreign exchange risk , currency , yield (engineering) , local currency , bond market , covered interest arbitrage , credit risk , financial economics , interest rate , interest rate parity , business , finance , materials science , metallurgy
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 U.S. 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.