The Premia on State-Contingent Sovereign Debt Instruments

Taehoon Kim and Antoine Levy
Authors registered in the RePEc Author Service: Deniz Igan

No 16795, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: State-contingent debt instruments such as GDP-linked warrants have garnered attention as a potential tool to help debt-stressed economies smooth repayments over business cycles, yet very few studies of the empirical properties of these instruments exist. This paper develops a general framework to estimate the time-varying risk premium of a state-contingent sovereign debt instrument. Our estimation framework applied to GDP-linked warrants issued by Argentina, Greece, and Ukraine reveals three stylized facts: (i) the risk premium in state-contingent instruments is high and persistent; (ii) the risk premium exhibits a pro-cyclical pattern; and (iii) the liquidity premium is higher and more volatile than that for plain-vanilla government bonds issued by the same sovereign. We then present a model in which investors fear ambiguity and that can account for the cyclical properties of the risk premium.

Keywords: State-contingent debt instruments; Gdp-linked warrants; Risk premia; Procyclicality (search for similar items in EconPapers)
JEL-codes: E44 G13 H63 (search for similar items in EconPapers)
Date: 2021-12
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Related works:
Working Paper: The premia on state-contingent sovereign debt instruments (2022)
Working Paper: The Premia on State-Contingent Sovereign Debt Instruments (2021)
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