Abstract:
This paper investigates the sources of variation in emerging market (EM) local currency bond risk premium. Empirical results suggest that both global and local factors contain valuable information in explaining the local currency bond excess returns. We show that economic policy uncertainty causes the excess bond returns to increase while positive innovations in the term spread, CP factor and implied FX volatility have downward impacts on the excess returns. Besides, the high level of spillover from developed markets to EMs may confine the diversification benefits from holding EM local currency bonds.
