Browsing by Subject "Credit risk"

Now showing 1 - 2 of 2

Open Access
Deviations from covered interest parity in the emerging markets after the global financial crisis
(Elsevier, 2023-03-25) Geyikçi, U. B.; Özyıldırım, Süheyla
In this paper, we focus on six emerging market economies to study the magnitude of systemic and persistent deviations from covered interest parity (CIP) using daily data between January 2010 and July 2018. We show the significant role of local factors, particularly credit and liquidity risk, in explaining sustained CIP deviations in these markets. Our findings suggest that the impact of credit risk on CIP deviations in emerging market economies may take two forms. In low-carry currencies, the well-known mechanism for credit risk operates so that the increase in credit risk exacerbates CIP deviations. Conversely, in high-carry currencies, the high usage of foreign exchange swaps makes swap rates react more than domestic rates, which causes CIP to decrease. We also present evidence that cost of illiquidity is an important driver to explain CIP deviations. We demonstrate that increased liquidity in emerging market currencies is not as large to prevent CIP deviations.
Open Access
Emerging market debt: Measuring credit quality and examining relative pricing
(Elsevier, 2001) Cumby, R. E.; Pastine, T.
We investigate the pricing of 'Brady' bonds that are issued by the governments of five developing countries as part of debt and debt service reduction agreements. We first present a measure of credit quality that takes account of the individual features of each bond and is comparable across bonds, across issuers, and over time. We then examine the evolution of the credit quality of each debt instrument from 1990 until the beginning of 2000. Next, we present evidence of a profitable trading strategy that exploits the information contained in this measure of credit quality. © 2001 Elsevier Science Ltd.