Cousin risks: the extent and the causes of positive correlation between country and currency risks
AbstractIf 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 InfoPaper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 507.
Date of creation: Sep 2005
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Country risk; currency risk; financial crisis; interest rate; cousin risk;
Other versions of this item:
- Marcio Garcia & Alexandre Lowenkron, 2004. "Cousin Risks: The Extent and the Causes of Positive Correlation between Country and Currency Risks," Econometric Society 2004 Latin American Meetings 68, Econometric Society.
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-02-05 (All new papers)
- NEP-FIN-2006-02-05 (Finance)
- NEP-FMK-2006-02-05 (Financial Markets)
- NEP-MAC-2006-02-05 (Macroeconomics)
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- Du, Wenxin & Schreger, Jesse, 2013. "Local Currency Sovereign Risk," International Finance Discussion Papers 1094, Board of Governors of the Federal Reserve System (U.S.).
- 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 -.
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