Are Asia Pacific Sovereign Bonds Worth the Risk?

A working paper by UCLA Anderson’s Mikhail Chernov, Notre Dame’s Drew Creal, and the Bank for International Settlements’ Peter Hördahl aim to uncover how investors are compensated for the joint risk of credit default and currency devaluation in sovereign bonds, particularly in a relatively new market.

Their research focuses on local currency sovereign bonds in Asia Pacific, which yield a hefty premium over the U.S. counterpart. The researchers evaluate risk premiums and determine which variables are important to explain the risk. This enables them to determine whether or not these bonds present an attractive risk-reward payoff.