The Bulgarian Foreign and Domestic Debt – A No-Arbitrage Macrofinancial View

Vilimir Yordanov ()

No wp1032, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: Bulgaria started the transition in the early 90’s with a sovereign default and debt restructuring. Later on, under a strict fiscal discipline, the country succeeded to reduce significantly its debt burden and is currently among the top EU performers in that respect. The current debt outstanding is composed mainly of local currency treasuries issued on the domestic market as well as Eurobonds and Global bonds on the international one. These instruments give rise to two risky spreads - credit and currency. The Currency Board Arrangement and the fixed exchange rate regime the country follows prevent from a discretionary monetary policy and this gives relative stability to the bonds’ yields and the risky spreads. Their financial role starts dominating over any macroeconomic one making them a natural object for investigation with financial engineering tools. The main focus of the paper is an analysis of the informational content of the risky spreads in a multifaceted way from noarbitrage,financial, and macroeconomic points of view.

Keywords: arbitrage; term structure; credit risk; credit spread; currency spread; HJM (search for similar items in EconPapers)
JEL-codes: C58 E43 F31 G12 (search for similar items in EconPapers)
Pages: pages
Date: 2012-03-01
New Economics Papers: this item is included in nep-mac and nep-tra
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