Sovereign Risk and Currently Returns

Pasquale Della Corte, Lucio Sarno, Maik Schmeling, Christian Wagner

Research output: Working paperResearch

Abstract

We empirically investigate the relation between sovereign risk and exchange rates for a broad set of currencies. An increase in the credit default swap (CDS) spread of a country is accompanied by a significant depreciation of the exchange rate. More generally, CDS spread changes have substantial explanatory power for currency returns which is largely driven by shocks to global credit risk. Consistent with the notion that sovereign risk is priced, we find that a country's exposure to global credit risk forecasts excess returns to trading exchange rates as well as to trading on the volatility, skewness, and kurtosis of currency returns.
We empirically investigate the relation between sovereign risk and exchange rates for a broad set of currencies. An increase in the credit default swap (CDS) spread of a country is accompanied by a significant depreciation of the exchange rate. More generally, CDS spread changes have substantial explanatory power for currency returns which is largely driven by shocks to global credit risk. Consistent with the notion that sovereign risk is priced, we find that a country's exposure to global credit risk forecasts excess returns to trading exchange rates as well as to trading on the volatility, skewness, and kurtosis of currency returns.
LanguageEnglish
Place of Publicationwww
PublisherSSRN: Social Science Research Network
Number of pages54
StatePublished - 2013

Keywords

  • Sovereign Risk
  • CDS Spreads
  • Currency Risk
  • Currency Returns
  • Volability Trading
  • Currency Options

Cite this

Della Corte, P., Sarno, L., Schmeling, M., & Wagner, C. (2013). Sovereign Risk and Currently Returns. www: SSRN: Social Science Research Network.
Della Corte, Pasquale ; Sarno, Lucio ; Schmeling, Maik ; Wagner, Christian. / Sovereign Risk and Currently Returns. www : SSRN: Social Science Research Network, 2013.
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Della Corte, P, Sarno, L, Schmeling, M & Wagner, C 2013 'Sovereign Risk and Currently Returns' SSRN: Social Science Research Network, www.

Sovereign Risk and Currently Returns. / Della Corte, Pasquale; Sarno, Lucio; Schmeling, Maik; Wagner, Christian.

www : SSRN: Social Science Research Network, 2013.

Research output: Working paperResearch

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Della Corte P, Sarno L, Schmeling M, Wagner C. Sovereign Risk and Currently Returns. www: SSRN: Social Science Research Network. 2013.