The Sovereign Default Puzzle: Modelling Issues and Lessons for Europe

Daniel Cohen and Sébastien Villemot

No 8971, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Why do countries default? This seemingly simple question has yet to be adequately answered in the literature. Indeed, prevailing modelling strategies compel the to choose between two unappealing model features: depending on the cost of default selected by the modeler, either the debt ratios are too high and the probability of default is too low or the opposite is true. In view of the historical evidence that countries always default after a crisis, we propose a novel approach to the theory of debt default and develop a model that matches the key stylized facts regarding sovereign risk.

Keywords: Levy stochastic processes; Sovereign debt (search for similar items in EconPapers)
JEL-codes: F34 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-cba
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The sovereign default puzzle: Modelling issues and lessons for Europe (2012)
Working Paper: The sovereign default puzzle: Modelling issues and lessons for Europe (2012)
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