Local Currency Sovereign Risk

By Wenxin Du, Jesse Schreger. 2013

123 citations recorded by the source corpus.

Do governments default on debt denominated in their own currency? We introduce a new measure of sovereign credit risk, the local currency credit spread, defined as the spread of local currency bonds over the synthetic local currency risk-free rate constructed using cross currency swaps. We find that local currency credit spreads are positive and sizable. Compared with credit spreads on foreign currency denominated debt, local currency credit spreads have lower means, lower cross-country correlations, and are less sensitive to global risk factors. Global risk aversion and liquidity factors can explain more time variation in these credit spread differentials than macroeconomic fundamentals.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/9524cce9243cf388b6fc415b6c1a84fc2eb04834

Citations in the corpus

• International Reserves and Rollover Risk (2013, unknown): “…currency and issued in local and foreign markets.22 While these debt characteristics may be important (for understanding the cost of defaulting and the possibility of 22 Du and Schreger (2016) document that the credit spreads for local-currency and foreign-currency debt are positively correlated.”
• Sovereign Yields and the Risk-Taking Channel of Currency Appreciation (2016, unknown): “In the existing literature, EME nancial conditions are commonly modelled as a function of the business cycle and monetary conditions as well as global nancial conditions (see, eg, Bellas, Papaioannou and Petrova (2010) and Du and Schreger (2016a)).”