Original Sin Redux: The Role of Duration Risk

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.

See More of Valentina Bruno's Media Coverage