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Local Currency Sovereign Risk

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  • Wenxin Du
  • Jesse Schreger

Abstract

We introduce a new measure of 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 are less sensitive to global risk factors. We consider how cash flow, liquidity and global risk aversion factors explain the credit spread differentials.

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  • Wenxin Du & Jesse Schreger, 2014. "Local Currency Sovereign Risk," Working Paper 102321, Harvard University OpenScholar.
  • Handle: RePEc:qsh:wpaper:102321
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    File URL: http://scholar.harvard.edu/schreger/node/102321
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    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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