Exchange Rate Dynamics and United States Dollar-Denominated Sovereign Bond Prices in Emerging Markets

Publication | December 2017

This paper conducts an empirical test on dollar-denominated sovereign credit spreads in emerging markets, such as the Philippines, to examine their relationship with each country’s exchange rate and the United States Treasury yields.

The exchange rates of the currencies of Brazil, Colombia, Mexico, the Philippines, the Russian Federation, and Turkey can explain the pricing of these countries’ United States dollar-denominated sovereign bonds, per empirical analysis. The relationship is particularly strong after the global financial crisis of 2008–2009. A two-factor pricing model is developed with closed-form solutions for the sovereign bonds. The correlated factors in the model—foreign exchange rates and United States risk-free interest rates—follow a double square-root process relevant in a low interest rate environment. The numerical results and associated error analysis show that the model credit spreads can broadly track market credit spreads.


  • Introduction
  • Relationships among Dollar-Denominated Sovereign Bond Spreads, Foreign Exchange Rates, and United States Treasury Yields
  • Dollar-Denominated Sovereign Bond Pricing Model
  • Market and Model-Implied Sovereign Bond Credit Spreads
  • Conclusions
  • Appendix: Derivation

Additional Details

  • Economics
  • Finance sector development
  • 36
  • 8.5 x 11
  • WPS179151-2
  • 2313-6537 (Print)
  • 2313-6545 (electronic)

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