EconPapers    
Economics at your fingertips  
 

Sovereigns at risk: A dynamic model of sovereign debt and banking leverage

Nuno Coimbra

Journal of International Economics, 2020, vol. 124, issue C

Abstract: This paper develops a dynamic model with heterogeneous investors and sovereign default to analyze the dynamic link between banking sector capitalization and sovereign bond yields. The banking sector is modelled as operating under a Value-at-Risk (VaR) constraint, which can bind occasionally. As default risk rises, the constraint may bind, generating a fall in demand for sovereign bonds that can be accompanied by a rise in the risk premium if other agents are more risk averse. In turn, the rise in risk premium leads to a feedback effect through debt accumulation dynamics and the probability of government default.

Keywords: Banking; Asset pricing; Sovereign default; Fiscal limits (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022199620300179
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:124:y:2020:i:c:s0022199620300179

DOI: 10.1016/j.jinteco.2020.103298

Access Statistics for this article

Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and Rodríguez-Clare, Andrés

More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2021-06-30
Handle: RePEc:eee:inecon:v:124:y:2020:i:c:s0022199620300179