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Global Risk in Long-Term Sovereign Debt

Author

Listed:
  • Nicola Borri
  • Kirill Shakhnov

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. (JEL F31, F34, G15)Received September 9, 2019; editorial decision March 25, 2021 by Editor: Nikolai Roussanov. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Nicola Borri & Kirill Shakhnov, 2021. "Global Risk in Long-Term Sovereign Debt," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 11(3), pages 654-693.
    • Handle: RePEc:oup:rasset:v:11:y:2021:i:3:p:654-693.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raab015
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    Cited by:

    1. Maxim Nikitin & Branko Urošević, 2022. "Globalisation, Exchange Rate Regimes, and Financial Contagion," Russian Journal of Money and Finance, Bank of Russia, vol. 81(4), pages 3-33, December.
    2. Andrade, Sandro C. & Ekponon, Adelphe & Jeanneret, Alexandre, 2023. "Sovereign risk premia and global macroeconomic conditions," Journal of Financial Economics, Elsevier, vol. 147(1), pages 172-197.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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