Exchange Rate Risk and Local Currency Sovereign Bond Yields in Emerging Markets

31 Pages Posted: 7 Jan 2015

See all articles by Blaise Gadanecz

Blaise Gadanecz

Bank for International Settlements - Monetary and Economic Department

Ken Miyajima

Bank for International Settlements (BIS) - Monetary and Economic Department

Chang Shu

Independent

Date Written: December 2014

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.

Keywords: emerging markets, exchange rate risk, local currency sovereign bond yields

JEL Classification: E43, E44

Suggested Citation

Gadanecz, Blaise and Miyajima, Ken and Shu, Chang, Exchange Rate Risk and Local Currency Sovereign Bond Yields in Emerging Markets (December 2014). BIS Working Paper No. 474, Available at SSRN: https://ssrn.com/abstract=2542218

Blaise Gadanecz (Contact Author)

Bank for International Settlements - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
+41 61 280 8417 (Phone)
+41 61 280 8100 (Fax)

Ken Miyajima

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Chang Shu

Independent ( email )

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