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The Determinants of Currency Risk Premium in Emerging Market Countries

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  • Halil Ibrahim Korkmaz
  • Yigit Onay

Abstract

[EN] This note explores the variations in currency risk premium among emerging market countries. In this respect, firstly the local currency bond yields are decomposed into its risk-free rate, default risk premium and currency risk premium components. The graphical illustrations show that the currency risk premium tends to vary across emerging market countries. Pooled ordinary least square method is conducted in order to explain the variation in currency risk premium among sample countries for years between 2007 and 2016. Estimation results indicate that country-specific macroeconomic variables (foreign exchange reserves, public sector debt stock, net international investment position) and uncertainty indicators (inflation and growth volatilities) play a great role on the variation in currency risk premium for emerging market countries. These findings provide significant implications for both monetary and fiscal policy domain. Accordingly, it can be concluded that countries’ borrowing costs in local currency can be reduced notably and the effectiveness of the monetary policy can be enhanced if the policies are oriented towards structurally imbalanced areas. [TR] Bu notta gelismekte olan ulkelerin kur riski primlerindeki degisimlerin aciklanmasi amaclanmistir. Bu kapsamda, ilk olarak yerel para birimi cinsinden ihrac edilen hazine tahvil getirileri; risksiz getiri orani, kredi temerrut riski primi ve kur riski primi olarak bilesenlerine ayrilmistir. Grafiksel gosterimler kur riski priminin gelismekte olan ulkeler arasinda onemli farkliliklar sergiledigine isaret etmektedir. Ulkeler arasinda ortaya cikan farkliliklari analiz etmek amaciyla 2007-2016 yillari arasi veriler ile havuzlanmis regresyon metodu kullanilmistir. Tahmin sonuclari, ulkelere ozgu degiskenlerin (doviz rezervleri, kamu borc stoku, net uluslararasi yatirim pozisyonu ile belirsizlik gostergeleri olarak kullanilan buyume orani ve enflasyon oynakliklari) gelismekte olan ulkelerin kur riski primlerindeki degisimlerde buyuk rol oynadiklarini gostermektedir. Calisma sonuclari para politikasi ile maliye politikasi alanlarina iliskin onemli cikarimlar sunmaktadir. Bu dogrultuda, politikalarin ekonomideki yapisal dengesizlikleri gidermeye yonelik olmasi durumunda gelismekte olan ulkelerdeki yerel para birimi cinsi borclanma maliyetlerinin dusebilecegi ve para politikasinin etkinliginin artabilecegi degerlendirilmektedir.

Suggested Citation

  • Halil Ibrahim Korkmaz & Yigit Onay, 2018. "The Determinants of Currency Risk Premium in Emerging Market Countries," CBT Research Notes in Economics 1806, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:econot:1806
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    References listed on IDEAS

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    1. Jaramillo, Laura & Weber, Anke, 2013. "Bond yields in emerging economies: It matters what state you are in," Emerging Markets Review, Elsevier, vol. 17(C), pages 169-185.
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    4. Domowitz, Ian & Glen, Jack & Madhavan, Ananth, 1998. "Country and Currency Risk Premia in an Emerging Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(2), pages 189-216, June.
    5. Wenxin Du & Jesse Schreger, 2016. "Local Currency Sovereign Risk," Journal of Finance, American Finance Association, vol. 71(3), pages 1027-1070, June.
    6. Mr. Lorenzo Giorgianni, 1997. "Foreign Exchange Risk Premium: Does Fiscal Policy Matter? Evidence From Italian Data," IMF Working Papers 1997/039, International Monetary Fund.
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