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    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
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    Citable URI
    http://hdl.handle.net/11540/7813
    Metadata
    Show full item record
    Thumbnail
    ewp-530.pdf (3.562Mb)
    Author
    Hui, Cho-Hoi
    Lo, Chi-Fai
    Chau, Po-Hon
    Theme
    Finance
    Regional
     
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise