The effects of exchange rate risk on local currency sovereign bond yields in Colombia

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La serie Borradores de Economía es una publicación de la Subgerencia de Estudios Económicos del Banco de la República. Los trabajos son de carácter provisional, las opiniones y posibles errores son responsabilidad exclusiva del autor y sus contenidos no comprometen al Banco de la República ni a su Junta Directiva.

Autor o Editor
Vargas-Páez, Andrea Carolina
Ardila-Dueñas, Carlos David

The series Borradores de Economía (Working Papers on Economics) contributes to the dissemination and promotion of the work by researchers from the institution. On multiple occasions, these works have been the result of collaborative work with individuals from other national or international institutions. This series is indexed at Research Papers in Economics (RePEc). The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.

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Abstract

In this article, we study the impact of exchange rate depreciation and volatility on the sovereignyield curve during the 2008 - 2020 timeframe. We do this by estimating univariate and multivariatetime series models and a threshold vector autoregressive model. Our findings support the presence ofnonlinearities in the relationship between the exchange rate risk and the yield curve level and slope.The bearish steepening resulting from a depreciation shock is doubled when the depreciation andvolatility are above the threshold, however when the volatility is high the impact is bigger and lastslonger. Contrary to lineal models, an increase of the level of the public debt has a significant impacton the yield curve level as sovereign bonds have been devalued during periods of high exchange ratevolatility. Besides, our results suggest that in presence of a risk aversion shock, investors appreciatelow volatility rather than low exchange rate depreciation.