A seminar by Professor Xiang Fang from HKU Business School
Title: Emerging Market Spreads and Risk Premia: Risk-free Rate and (In)Convenience Yield (with Alessandro Dovis and Yang Liu)
Abstract: We study the world interest rate drivers of sovereign spreads in emerging markets. Utilizing a structural VAR, we identify the demand and supply shocks that differentially impact world interest rate, global output, emerging market output, sovereign spread, and convenience yield. These shocks suggest substantial risk premia for sovereign bonds, which vary with world interest rates and exhibit considerable cross-country dispersion. A model with structural shocks quantitatively explains the effect of interest rates on sovereign default. The model indicates a higher correlation between spreads than between outputs. Our findings highlight the importance of distinguishing the various drivers of world interest rates that impact sovereign spreads in distinct ways.
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