Exchange Rate Dynamics and US Dollar-denominated Sovereign Bond Prices in Emerging Markets
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AbstractUsing data on Brazil, Colombia, Mexico, the Philippines, Russia and Turkey, our empirical results show that the exchange rates of their currencies have adequate explanatory power in explaining their US dollar-denominated sovereign bonds, particularly in the post-crisis period. We develop a two-factor pricing model with closed-form solutions for the sovereign bonds in which the correlated factors are foreign exchange rates and US risk-free interest rates that follow a double square-root process relevant in the low interest rate environment. The numerical results and associated error analysis show that the model credit spreads can broadly track the market credit spreads.
All Author(s) ListC.H. Hui, C.F. Lo, P.H. Chau
Journal nameInstitute of Global Finance Working Paper
Detailed descriptionPaper 3
Volume Number3
Issue Number1
PublisherInstitute of Global Finance
LanguagesEnglish-United Kingdom

Last updated on 2018-18-01 at 11:17