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Cousin risks: the extent and the causes of positive correlation between country and currency risks

Author

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  • Marcio Gomes Pinto Garcia

    () (Department of Economics PUC-Rio)

  • Alexandre Lowenkron

    (Department of Economics PUC-Rio)

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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Suggested Citation

  • Marcio Gomes Pinto Garcia & Alexandre Lowenkron, 2005. "Cousin risks: the extent and the causes of positive correlation between country and currency risks," Textos para discussão 507, Department of Economics PUC-Rio (Brazil).
  • Handle: RePEc:rio:texdis:507
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    File URL: http://www.econ.puc-rio.br/pdf/td507.pdf
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    Cited by:

    1. Du, Wenxin & Schreger, Jesse, 2013. "Local Currency Sovereign Risk," International Finance Discussion Papers 1094, Board of Governors of the Federal Reserve System (U.S.).
    2. 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 -.

    More about this item

    Keywords

    Country risk; currency risk; financial crisis; interest rate; cousin risk;

    JEL classification:

    • 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

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