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Exchange rate risk and local currency sovereign bond yields in emerging markets

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  • Blaise Gadanecz
  • Ken Miyajima
  • Chang Shu

Abstract

In this paper we consider the role of exchange rate risk in influencing local currency sovereign bond yields in emerging market economies (EMEs). We explicitly account for exchange rate expectations and uncertainty around them, as measured by exchange rate volatility. The analysis points to an important influence of exchange rate risk: when exchange rate volatility increases, investors require a larger yield compensation for holding EME local currency sovereign bonds. The impact of exchange rate volatility has become more important since May 2013, when investors realised that the Federal Reserve may reduce the scale of its asset purchases sooner than previously expected.

Suggested Citation

  • Blaise Gadanecz & Ken Miyajima & Chang Shu, 2014. "Exchange rate risk and local currency sovereign bond yields in emerging markets," BIS Working Papers 474, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:474
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    Cited by:

    1. Madhusudan Mohanty & Kumar Rishabh, 2016. "Financial intermediation and monetary policy transmission in EMEs: What has changed post-2008 crisis?," BIS Working Papers 546, Bank for International Settlements.
    2. Jakree Koosakul, 2016. "Daily Movements in the Thai Yield Curve: Fundamental and Non-Fundamental Drivers," PIER Discussion Papers 30, Puey Ungphakorn Institute for Economic Research.
    3. Boris Hofmann & Ilhyock Shim & Hyun Song Shin, 2016. "Sovereign yields and the risk-taking channel of currency appreciation," BIS Working Papers 538, Bank for International Settlements.
    4. Belke, Ansgar & Dubova, Irina & Volz, Ulrich, 2017. "Bond Yield Spillovers from Major Advanced Economies to Emerging Asia," GLO Discussion Paper Series 41, Global Labor Organization (GLO).
    5. Sarmiento, Julio & Cayon, Edgardo & Collazos, María & Sandoval, Juan S., 2017. "Positive asymmetric information in volatile environments: The black market dollar and sovereign bond yields in Venezuela," Research in International Business and Finance, Elsevier, vol. 41(C), pages 547-555.
    6. Wing-Choong Lai & Kim-Leng Goh, 2019. "Impact of Chinese Yuan Devaluation on the Dependence Structure: The Archimedean Copula Approach," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(01), pages 1-27, March.
    7. Gadanecz, Blaise & Miyajima, Ken & Shu, Chang, 2018. "Emerging market local currency sovereign bond yields: The role of exchange rate risk," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 371-401.
    8. Bonizzi, Bruno, 2017. "Institutional investors’ allocation to emerging markets: A panel approach to asset demand," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 47-64.
    9. Gete, Pedro & Melkadze, Givi, 2018. "Aggregate volatility and international dynamics. The role of credit supply," Journal of International Economics, Elsevier, vol. 111(C), pages 143-158.
    10. Hassan, M. Kabir & Paltrinieri, Andrea & Dreassi, Alberto & Miani, Stefano & Sclip, Alex, 2018. "The determinants of co-movement dynamics between sukuk and conventional bonds," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 73-84.
    11. Andrea Carolina Vargas-Páez & Carlos David Ardila-Dueñas, 2021. "Efecto del riesgo de tipo de cambio en la rentabilidad de los bonos soberanos en Colombia," Borradores de Economia 1165, Banco de la Republica de Colombia.
    12. Konopczak, Michal, 2015. "Government debt holdings of non-residents – an analysis of the impact on selected emerging economies’ sovereign risk," MPRA Paper 68597, University Library of Munich, Germany.
    13. Dachraoui, Hajer & Smida, Mounir & Sebri, Maamar, 2020. "Role of capital flight as a driver of sovereign bond spreads in Latin American countries," International Economics, Elsevier, vol. 162(C), pages 15-33.
    14. repec:aly:journl:201608 is not listed on IDEAS
    15. Jakree Koosakul, 2016. "Daily Movements in the Thai Yield Curve: Fundamental and Non-Fundamental Drivers," PIER Discussion Papers 30., Puey Ungphakorn Institute for Economic Research, revised Jun 2016.

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    Keywords

    emerging markets; exchange rate risk; local currency sovereign bond yields;
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