scholarly journals Sovereign Default Risk and Uncertainty Premia

2016 ◽  
Vol 8 (3) ◽  
pp. 230-266 ◽  
Author(s):  
Demian Pouzo ◽  
Ignacio Presno
Keyword(s):  
Default Risk ◽  
Sovereign Debt ◽  
Probability Model ◽  
Model Misspecification ◽  
Sovereign Default ◽  
Sovereign Bond ◽  
Endogenous Default ◽  
Sovereign Default Risk ◽  
International Investors ◽  
Bond Spreads

This paper studies how international investors' concerns about model misspecification affect sovereign bond spreads. We develop a general equilibrium model of sovereign debt with endogenous default wherein investors fear that the probability model of the underlying state of the borrowing economy is misspecified. Consequently, investors demand higher returns on their bond holdings to compensate for the default risk in the context of uncertainty. In contrast with the existing literature on sovereign default, we match the bond spreads dynamics observed in the data together with other business cycle features for Argentina, while preserving the default frequency at historical low levels. (JEL E43, E44, F34, G12, G21, H63, O16)

scholarly journals Structural breaks in the interaction between bank and sovereign default risk

SERIEs ◽  
2020 ◽  
Vol 11 (4) ◽  
pp. 531-559 ◽  
Author(s):  
Lidija Lovreta ◽  
Joaquín López Pascual
Keyword(s):  
Default Risk ◽  
Sovereign Debt ◽  
Structural Breaks ◽  
Debt Crisis ◽  
Turning Points ◽  
Sovereign Default ◽  
Supporting Evidence ◽  
Public Events ◽  
Sovereign Default Risk ◽  
The Many

AbstractThe recent financial and sovereign debt crises emphasized the interdependence between bank and sovereign default risk and showed that major shocks may lead to a self-reinforcing negative spiral. In this paper, we analyse the pattern of interaction between bank and sovereign default risk by endogenously estimating the timing of structural breaks. The endogenous approach avoids the problem of choosing the number and the location of important turning points associated with the exogenous selection of break dates, commonly applied in the literature. In addition, it provides additional insight to which (if any) of the many exogenously proposed breaks are of particular importance to one specific economy, which can help policy makers to structure their actions accordingly. Using Spain during the 2008–2012 period as an illustrative example, we find supporting evidence for the three distinctive phases, marked by the breaks in the early-January and mid-May 2010. The three phases are characterized with an evident change in the bank–sovereign interaction, and we detect a bi-directional relationship only during the interim phase, i.e. at the very peak of the European sovereign debt crisis. We show that endogenously identified turning points coincide with important public events that affect investors’ perception about the government’s capacity and willingness to repay debt and support distressed banks. Finally, we provide evidence that structural dependence in the system extends to the interaction between bank and sovereign default risk volatility.

scholarly journals Pricing Sovereign Debt in Resource-Rich Economies

2019 ◽  
Vol 19 (240) ◽  
Author(s):  
Thomas McGregor
Keyword(s):  
Interest Rate ◽  
Default Risk ◽  
Sovereign Debt ◽  
Emerging Market ◽  
Sovereign Default ◽  
Oil Price ◽  
Risk Premiums ◽  
Sovereign Spreads ◽  
Sovereign Default Risk ◽  
Interest Rate Spreads

How do oil price movements affect sovereign spreads in an oil-dependent economy? I develop a stochastic general equilibrium model of an economy exposed to co-moving oil price and output processes, with endogenous sovereign default risk. The model explains a large proportion of business cycle fluctuations in interest-rate spreads in oil-exporting emerging market economies, particularly the countercyclicallity of interest rate spreads and oil prices. Higher risk-aversion, more impatient governments, larger oil shares and a stronger correlation between domestic output and oil price shocks all lead to stronger co-movements between risk premiums and the oil price.

Fiscal Sustainability, Default Risk and Euro Area Sovereign Bond Spreads

2011 ◽  
Author(s):  
Vladimir Borgy ◽  
Thomas Laubach ◽  
Jean-Stéphane Mésonnier ◽  
Jean-Paul Renne
Keyword(s):  
Euro Area ◽  
Default Risk ◽  
Fiscal Sustainability ◽  
Sovereign Bond ◽  
Bond Spreads
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