Publications
Publications
- June 2016
- Journal of Finance
Local Currency Sovereign Risk
By: Wenxin Du and Jesse Schreger
Abstract
We introduce a new measure of emerging market 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 lower sensitivity to global risk factors. We discuss several major sources of credit-spread differentials, including positively correlated credit and currency risk, selective default, capital controls, and various financial market frictions.
Keywords
Citation
Du, Wenxin, and Jesse Schreger. "Local Currency Sovereign Risk." Journal of Finance 71, no. 3 (June 2016): 1027–1070.