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Loss Aversion and Search for Yield in Emerging Markets Sovereign Debt

Ricardo Sabbadini

No 2018_16, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: A decline in international risk-free interest rates decreases emerging markets (EM) sovereign spreads. I show that a quantitative model of sovereign debt and default exhibits this pattern if foreign lenders are loss-averse and have reference dependence. This happens because investors search for yield in risky EM bonds when the risk-free rate is lower than their return of reference

Keywords: sovereign spread; search for yield; loss aversion; low interest rate (search for similar items in EconPapers)
JEL-codes: E43 F34 F41 G41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-opm and nep-upt
Date: 2018-10-30
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