Domestic Currency Emerging Market Bonds Pricing and Risk Management Aspects

Authors

  • Salih N. Neftci University Center of CUNY University of Reading, U.K. image/svg+xml

Keywords:

emerging market bonds, domestic currency, devaluation risk, credit risk, nonparametric pricing, interest rate modelling

Abstract

Domestic currency emerging market bonds form an indirect way of trading currency and credit risk. It is true that unlike eurobonds or Bradys, domestic currency emerging market bonds have no default risk in a classical sense. These bonds are issued by local governments and can be paid one way or another by newly issued currency, if need be. Instead, they carry a significant "devaluation risk". In this paper we discuss the environment that supports such bonds, introduce the main parameters and risks, and compare some ways of modelling and pricing these instruments. The paper illustrates that a non-parametric interest rate modelling will be more appropriate for pricing local currency emerging markets bonds.

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Author Biography

Salih N. Neftci, University Center of CUNY University of Reading, U.K.

Graduate School, University Center of Cuny and ISMA Centre, University of Reading

References

Aït-Sahalia, Y. (1996). Non-parametric pricing of interest rate derivative securities. Econometrica, 64(3), 527–560.

Aït-Sahalia, Y. (1995). Interest rate models. The Review of Financial Studies, 9(2), 385–426.

Heath, D., Jarrow, R., & Morton, A. (1992). Bond pricing and term structure of interest rates: A new methodology for contingent claim valuation. Econometrica, 60(1), 77–105. https://doi.org/10.2307/2951677

Musiela, M., & Rutkowski, M. (1997). Martingale methods in financial modelling. Springer-Verlag. https://doi.org/10.1007/978-3-662-22132-7

Neftci, S. (1999). Short FX positions and financial crises [Manuscrito].

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Published

2000-04-30

How to Cite

Neftci, S. N. (2000). Domestic Currency Emerging Market Bonds Pricing and Risk Management Aspects. Economic Analysis Review, 15(1), 47–59. Retrieved from https://www.rae-ear.org/index.php/rae/article/view/97

Issue

Vol. 15 No. 1 (2000)

Section

Articles

License

Copyright (c) 2000 Salih N. Neftci

Creative Commons License

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

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