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Sovereign Risk Premia

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Author Info

  • Adrien Verdelhan

    (MIT Sloan)

  • Nicola Borri

    (LUISS University)

Abstract

Emerging countries tend to default when their economic conditions worsen. If bad times in an emerging country correspond to bad times for the US investor, then these foreign sovereign bonds are particularly risky and should offer high returns. We explore how this mechanism plays out in the data and in a general equilibrium model of optimal borrowing and default. Empirically, we obtain a cross-section of sovereign bond returns: the higher the correlation between past bond returns and US corporate default risk, the higher the average bond returns. A model of risk-averse lenders with external habit preferences can replicate this feature.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1122.

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Date of creation: 2010
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Handle: RePEc:red:sed010:1122

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References

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  1. David Benjamin & Mark L. J. Wright, 2009. "Recovery Before Redemption: A Theory Of Delays In Sovereign Debt Renegotiations," CAMA Working Papers 2009-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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Cited by:
  1. Javier Bianchi & Juan Carlos Hatchondo & Leonardo Martinez, 2013. "International reserves and rollover risk," Working Paper 13-01, Federal Reserve Bank of Richmond.
  2. Juan Carlos Hatchondo & Cesar Sosa-Padilla & Leonardo Martinez, 2010. "Debt dilution, overborrowing, and sovereign default risk," 2010 Meeting Papers 481, Society for Economic Dynamics.
  3. Juan Carlos Hatchondo & Francisco Roch & Leonardo Martinez, 2012. "Fiscal Rules and the Sovereign Default Premium," IMF Working Papers 12/30, International Monetary Fund.
  4. Jens Hilscher & Yves Nosbusch, 2010. "Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt," Review of Finance, European Finance Association, vol. 14(2), pages 235-262.
  5. Karen K. Lewis, 2011. "Global asset pricing," Globalization and Monetary Policy Institute Working Paper 88, Federal Reserve Bank of Dallas.
  6. Thomas Nitschka, 2012. "Global and country-specific business cycle risk in time-varying excess returns on asset markets," Working Papers 2012-10, Swiss National Bank.
  7. Yan Bai & Cristina Arellano, 2012. "Linkages across sovereign debt markets," 2012 Meeting Papers 414, Society for Economic Dynamics.
  8. Flavia Corneli & Emanuele Tarantino, 2011. "Reserve management and sovereign debt cost in a world with liquidity crises," Temi di discussione (Economic working papers) 797, Bank of Italy, Economic Research and International Relations Area.

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