This paper focuses on emerging market government bonds issued in local currency with different maturities. Foreign investors face interest rate, currency, and credit risks. We consider the entire term structure of carry trade returns and find that, while the default premium does not contribute to carry trade strategies, the contribution of interest rate risk, captured by the term premium, is large and increases with maturity. We introduce default risk in an otherwise standard affine model; we show that the volatility of the permanent component of the SDFs must be different across emerging markets in order to match these stylized facts.

Global Risk in Long-Term Sovereign Debt / Borri, Nicola; Shakhnov, Kirill. - In: THE REVIEW OF ASSET PRICING STUDIES. - ISSN 2045-9920. - 11:3(2021), pp. 654-693. [10.1093/rapstu/raab015]

Global Risk in Long-Term Sovereign Debt

Nicola Borri
;
2021

Abstract

This paper focuses on emerging market government bonds issued in local currency with different maturities. Foreign investors face interest rate, currency, and credit risks. We consider the entire term structure of carry trade returns and find that, while the default premium does not contribute to carry trade strategies, the contribution of interest rate risk, captured by the term premium, is large and increases with maturity. We introduce default risk in an otherwise standard affine model; we show that the volatility of the permanent component of the SDFs must be different across emerging markets in order to match these stylized facts.
local currency, carry trade, term premium
Global Risk in Long-Term Sovereign Debt / Borri, Nicola; Shakhnov, Kirill. - In: THE REVIEW OF ASSET PRICING STUDIES. - ISSN 2045-9920. - 11:3(2021), pp. 654-693. [10.1093/rapstu/raab015]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11385/206110
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