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Country and Currency Risk Premia in an Emerging Market

Published online by Cambridge University Press:  06 April 2009

Ian Domowitz ,
Jack Glen  and
Ananth Madhavan
Ian Domowitz
Affiliation:
Department of Economics and Institute for Policy Research, Northwestern University, Evanston, IL 60208
Jack Glen
Affiliation:
Economics Division, International Finance Corporation, Washington, DC 20433
Ananth Madhavan
Affiliation:
Department of Finance, University of Southern California, Los Angeles, CA 90089.
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Abstract

The magnitude and determinants of credit and currency risks are topics of considerable importance. This paper uses data on peso- and dollar-denominated debt issued by the Mexican government to identify currency and country risk premia. We show that shocks in equity and debt market returns translate into long-term increases in the premium demanded by investors with respect to currency and country factors. Country and currency premia help explain equity returns and closed-end fund discounts. Additional evidence is provided showing that investors did not anticipate the magnitude or timing of the currency devaluation of December 1994 and the subsequent financial crisis.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 33 , Issue 2 , June 1998 , pp. 189 - 216
Copyright
Copyright © School of Business Administration, University of Washington 1998

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