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Cousin Risks: The Extent and the Causes of Positive Correlation between Country and Currency Risks

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  • Marcio Garcia
  • Alexandre Lowenkron

Abstract

If country and currency risk premiums are positively correlated, a negative international liquidity shock harms twice the economy, thereby substantially increasing interest rates. This harmful positive correlation between country and currency risk premiums observed in some countries is called cousin risks. We, first, identify the extent of this phenomenon by separating a sample of countries into two groups: the one where the positive correlation is observed and the one where it is not. Based on this taxonomy, we investigate the determinants of the cousin risks. Results indicate that currency mismatch and low financial deepening are strongly associated with the phenomenon

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 68.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:68

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Keywords: Country Risk; Currency Risk; Cousin Risks;

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Cited by:
  1. Martin Grandes & Marcel Peter & Nicolas Pinaud, 2010. "Pricing the Currency Premium Under Flexible Exchange Rates: Evidence from South Africa," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(60), pages 7-52, October -.
  2. Du, Wenxin & Schreger, Jesse, 2013. "Local Currency Sovereign Risk," International Finance Discussion Papers 1094, Board of Governors of the Federal Reserve System (U.S.).

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