The Premia on State-Contingent Sovereign Debt Instruments

Deniz Igan, Taehoon Kim and Antoine Levy

No 2021/282, IMF Working Papers from International Monetary Fund

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 f ramework 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; liquidity premium; GDP-linked warrant; estimation framework; SCDI premium; Sovereign bonds; Securities; Bonds; Liquidity; Debt restructuring; Global (search for similar items in EconPapers)
Pages: 48
Date: 2021-12-03
New Economics Papers: this item is included in nep-ban and nep-upt
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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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