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News, sovereign debt maturity, and default risk

Maximiliano Dvorkin (), Juan Sanchez, Horacio Sapriza and Emircan Yurdagul ()

No 2018-033, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Leading into a debt crisis, interest rate spreads on sovereign debt rise before the economy experiences a decline in productivity, suggesting that news about future economic developments may play an important role in these episodes. In a VAR estimation, a news shock has a larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity. A quantitative model of news and sovereign debt default with endogenous maturity choice generates impulse responses and a variance decomposition similar to the empirical VAR estimates. The dynamics of the economy after a bad news shock share some features of a productivity shock and others of sudden stop events. However, unlike episodes of sudden stops, long-term debt does not shield the country from bad news shocks, and it may even exacerbate default risk. Finally, an increase in the precision of news allows the government to improve its debt maturity management, especially during periods of high stress in credit markets, and thus face lower yield spreads while increasing the amount of debt.

Keywords: Spreads; Sovereign Debt; Maturity; Default; Country Risk; Crises; News (search for similar items in EconPapers)
JEL-codes: F34 F41 G15 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2018-10-31, Revised 2020-05-18
New Economics Papers: this item is included in nep-dge, nep-fmk and nep-opm
Note: Title of previous version: News, Country Risk, and Sovereign Default.
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Published in Journal of International Economics

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Related works:
Journal Article: News, sovereign debt maturity, and default risk (2020) Downloads
Working Paper: News, sovereign debt maturity, and default risk (2019) Downloads
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DOI: 10.20955/wp.2018.033

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