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Local currency bond risk premia: A panel evidence on emerging markets

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  • Cepni, Oguzhan
  • Güney, I.Ethem
Abstract
This paper investigates the sources of variation in emerging market (EM) local currency bond risk premium. We find that macroeconomic and financial variables contain valuable information in explaining local currency bond excess returns. Additionally, we extend our analysis to investigate how the influence of different factors change depending on the level of global risk appetite. Although macro fundamentals have an important role in explaining the risk premiums during tranquil times, investors pay less attention to changes in inflation forecast in times of high risk aversion. Positive credit rating changes decrease the bond risk premium in both regimes with a different magnitude. Also, the influence of exchange rate volatility is more pronounced during the time of market stress.

Suggested Citation

  • Cepni, Oguzhan & Güney, I.Ethem, 2019. "Local currency bond risk premia: A panel evidence on emerging markets," Emerging Markets Review, Elsevier, vol. 38(C), pages 182-196.
    • Handle: RePEc:eee:ememar:v:38:y:2019:i:c:p:182-196
    DOI: 10.1016/j.ememar.2019.01.002
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    Cited by:

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    2. Noureddine Benlagha & Wael Hemrit, 2022. "Does economic policy uncertainty matter to explain connectedness within the international sovereign bond yields?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(1), pages 1-21, January.
    3. Balcilar, Mehmet & Usman, Ojonugwa & Gungor, Hasan & Roubaud, David & Wohar, Mark E., 2021. "Role of global, regional, and advanced market economic policy uncertainty on bond spreads in emerging markets," Economic Modelling, Elsevier, vol. 102(C).
    4. Ho, Edmund Ho Cheung, 2022. "Foreign participation in local currency government bond markets in emerging Asia: Benefits and pitfalls to market stability," Journal of International Money and Finance, Elsevier, vol. 128(C).
    5. Oguzhan Cepni & Rangan Gupta & I. Ethem Güney & M. Yilmaz, 2020. "Forecasting local currency bond risk premia of emerging markets: The role of cross‐country macrofinancial linkages," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(6), pages 966-985, September.
    6. Çepni, Oğuzhan & Guney, I. Ethem & Gupta, Rangan & Wohar, Mark E., 2020. "The role of an aligned investor sentiment index in predicting bond risk premia of the U.S," Journal of Financial Markets, Elsevier, vol. 51(C).
    7. Karahan, Cenk C. & Soykök, Emre, 2022. "Term premium dynamics in an emerging market: Risk, liquidity, and behavioral factors," International Review of Financial Analysis, Elsevier, vol. 84(C).
    8. Ge, Futing & Zhang, Weiguo, 2022. "The determinants of cross-border bond risk premia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).

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    More about this item

    Keywords

    Local currency bond risk premium; Dynamic factor model; Emerging markets; Panel regression;
    All these keywords.

    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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