Maturity, indebtedness, and default risk

Satyajit Chatterjee () and Burcu Eyigungor

No 09-2, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We present a novel and tractable model of long-term sovereign debt. We make two sets of contributions. First, on the substantive side, using Argentina as a test case we show that unlike one-period debt models, our model of long-term sovereign debt is capable of accounting for the average spread, the average default frequency, and the average debt-to-output ratio of Argentina over the 1991-2001 period without any deterioration in the model's ability to account for Argentina's cyclical facts. Using our calibrated model we determine what Argentina's debt, default frequency and welfare would have been if Argentina had issued only short-term debt. Second, on the methodological side, we advance the theory of sovereign debt begun in Eaton and Gersovitz (1981) by establishing the existence of an equilibrium pricing function for long-term sovereign debt and by providing a fairly complete set of characterization results regarding equilibrium default and borrowing behavior. In addition, we identify and solve a computational problem associated with pricing long-term unsecured debt that stems from nonconvexities introduced by the possibility of default.

Keywords: Default (Finance); Debts, Public; Bonds (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cmp, nep-dge and nep-rmg
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Maturity, Indebtedness, and Default Risk (2012)
Working Paper: Maturity, indebtedness, and default risk (2011)
Working Paper: Maturity, indebtedness, and default risk (2010)
Working Paper: Maturity, Indebtedness, and Default Risk (2009)
Working Paper: Maturity, Indebtedness and Default Risk (2008)
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