Sovereign Default Risk and Uncertainty Premia
American Economic Journal: Macroeconomics
vol. 8,
no. 3, July 2016
(pp. 230-66)
Abstract
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.Citation
Pouzo, Demian, and Ignacio Presno. 2016. "Sovereign Default Risk and Uncertainty Premia." American Economic Journal: Macroeconomics, 8 (3): 230-66. DOI: 10.1257/mac.20140337Additional Materials
JEL Classification
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- F34 International Lending and Debt Problems
- G12 Asset Pricing; Trading volume; Bond Interest Rates
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- H63 National Debt; Debt Management; Sovereign Debt
- O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
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