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Sovereign default and the choice of maturity

Horacio Sapriza, Emircan Yurdagul () and Juan Sanchez

No 799, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: This paper provides a new framework to study the term structure of interest rate spreads and the maturity composition of sovereign bonds. As observed in the literature, sovereign interest rate spreads increase during crises, with short term interest rate spreads rising more than long term spreads. The inversion of the yield curve is accompanied by lower debt issuance and a shortening of the maturity structure. In addition, sovereign debt restructurings may lead to a non-monotonic term structure of interest rate spreads, as evidenced during the recent sovereign debt crisis in Greece, when the yield curve developed a humped shape. To properly capture the observed variation of expected sovereign debt collection at different horizons and thus account for the dynamics in the maturity of debt issuances and its co-movement with the level of spreads across maturities found in the data, this paper introduces a new quantitative dynamic model of the term structure of interest rate spreads of government defaultable debt under incomplete markets.

New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
Date: 2014
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Working Paper: Sovereign Default and the Choice of Maturity (2017) Downloads
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