Determinants of Spreads on Sovereign Bank Loans: The Role of Credit History
AbstractThis paper is an empirical investigation into the role of credit history in determining the spread on sovereign bank loans. It employs an error-in-variables approach used in rational-expectations-macro-econometrics to set up a structural model that links sovereign loan spreads to realized repayment behavior. Unlike the existing empirical literature, its instrumental variables method allows for distinguishing a direct influence of past repayment problems (a ”pure reputation” effect) from one that goes through increased default probabilities. Using developing country data from the period 1973-1981 and constructing continuous variables for credit history, we find that past default is a significant determinant of the spread, even after including country fixed effects. Moreover, its reduced-form effect is very similar to its structural form effect, indicating that most of the influence of past repayment problems is through the reputation channel. Overall, past and predicted future default are substantial determinants of sovereign bank loan spreads.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2006/1.
Length: 31 pages
Date of creation: 2006
Date of revision:
reputation; sovereign bank loan spreads; default risk; rational expectations.;
Find related papers by JEL classification:
- F30 - International Economics - - International Finance - - - General
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-02-26 (All new papers)
- NEP-FIN-2006-02-26 (Finance)
- NEP-FMK-2006-02-26 (Financial Markets)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Veronica Guerrieri & Peter Kondor, 2010.
"Fund managers, career concerns, and asset price volatility,"
446, Federal Reserve Bank of Minneapolis.
- Veronica Guerrieri & Peter Kondor, 2012. "Fund Managers, Career Concerns, and Asset Price Volatility," American Economic Review, American Economic Association, vol. 102(5), pages 1986-2017, August.
- Guerrieri, Veronica & Kondor, Péter, 2011. "Fund Managers, Career Concerns, and Asset Price Volatility," CEPR Discussion Papers 8454, C.E.P.R. Discussion Papers.
- Veronica Guerrieri & Péter Kondor, 2009. "Fund Managers, Career Concerns, and Asset Price Volatility," NBER Working Papers 14898, National Bureau of Economic Research, Inc.
- Ugo Panizza, 2013. "Do We Need a Mechanism for Solving Sovereign Debt Crises? A Rule-Based Discussion," IHEID Working Papers 03-2013, Economics Section, The Graduate Institute of International Studies.
- Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-98, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Johanna Jeney).
If references are entirely missing, you can add them using this form.