Exchange Rate Dynamics and United States Dollar-Denominated Sovereign Bond Prices in Emerging Markets
Hui, Cho-Hoi; Lo, Chi-Fai; Chau, Po-Hon | December 2017
Abstract
The study conducts an empirical test on dollar-denominated sovereign credit spreads in emerging markets, including Brazil, Colombia, Mexico, the Philippines, the Russian Federation, and Turkey to examine their relationship with each country’s exchange rate and the United States (US) Treasury yields. The relationship between each country’s exchange rate and the pricing of each country’s US-dollar denominated sovereign bonds was particularly strong after the global financial crisis of 2008–2009. A two-factor pricing model is developed with closed-form solutions for the sovereign bonds. The correlated factors in the model are foreign exchange rates and US risk-free interest rates that follow a double square-root process relevant in a low interest rate environment. The numerical results and associated error analysis show that the model credit spreads can broadly track market credit spreads.
Citation
Hui, Cho-Hoi; Lo, Chi-Fai; Chau, Po-Hon. 2017. Exchange Rate Dynamics and United States Dollar-Denominated Sovereign Bond Prices in Emerging Markets. © Asian Development Bank. http://hdl.handle.net/11540/7813. License: CC BY 3.0 IGO.ISSN
2313-6537 (Print)
2313-6545 (electronic)
Keywords
Economic integration
Development Bank
Capital Market
Regional Plans
Regional Development Bank
Development finance
Municipal Bonds
Asian Development Bank
Development
Regional Economic Integration
Financial Sector Policies
Financial Risk Management
Bond Financing
Development Banks
Local government bonds
Bonds
Catastrophe bonds
Bond funds
Bond market
Multilateral development banks
Show allCollapse