Global Risk in Long-Term Sovereign Debt

78 Pages Posted: 13 Dec 2017 Last revised: 26 Mar 2021

See all articles by Nicola Borri

Nicola Borri

LUISS University - Department of Economics and Finance

Kirill Shakhnov

University of Surrey

Date Written: June 13, 2018

Abstract

This paper focuses on emerging market government bonds issued in local currency with different maturities. Foreign investors face interest rate, currency, and credit risks. We consider the entire term structure of carry trade returns and find that, while the default premium does not contribute to carry trade strategies, the contribution of interest rate risk, captured by the term premium, is large and increases with maturity. We introduce default risk in an otherwise standard affine model; we show that the volatility of the permanent component of the SDFs must be different across emerging markets in order to match these stylized facts.

Keywords: local currency; carry trade; term premium

JEL Classification: F31, F34, G15

Suggested Citation

Borri, Nicola and Shakhnov, Kirill, Global Risk in Long-Term Sovereign Debt (June 13, 2018). Available at SSRN: https://ssrn.com/abstract=3083642 or http://dx.doi.org/10.2139/ssrn.3083642

Nicola Borri (Contact Author)

LUISS University - Department of Economics and Finance ( email )

viale Romania, 32
Rome, 00197
Italy

HOME PAGE: http://docenti.luiss.it/borri/

Kirill Shakhnov

University of Surrey ( email )

Guildford
Guildford, Surrey GU2 5XH
United Kingdom

HOME PAGE: http:// https://sites.google.com/site/kshakhnov/

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