Professor Valentina Bruno co-authored a journal article forthcoming in the Review of Financial Studies.
In the paper, Bruno and her two co-authors argue that emerging-market debt risk is not eliminated when countries borrow in domestic currency; instead, it shifts from borrowers to lenders and can compound through duration risk when the dollar appreciates.
Key Takeaways
- The paper challenges the view that currency risk is the central risk in emerging-market debt.
- Borrowing in domestic currency shifts risk from borrowers to lenders rather than removing it.
- Dollar appreciation and long maturities can combine to compound the damage through duration risk.