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Pricing growth-indexed bonds

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  • Chamon, Marcos
  • Mauro, Paolo

Abstract

Growth-indexed bonds have been suggested as a way of reducing the procyclicality of emerging-market countries' fiscal policies and the likelihood of costly debt crises. Investor attitude surveys suggest that pricing difficulties are seen as a considerable obstacle. In an effort to reduce such concerns, this article presents a simple way of pricing growth-indexed bonds. As a pleasant by-product, the analysis tracks the quantitative implications of an increase in the share of growth-indexed bonds in total debt, measuring the ensuing decline in the probability of default and the reduction in the spreads at which standard bonds can be issued.
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Suggested Citation

  • Chamon, Marcos & Mauro, Paolo, 2006. "Pricing growth-indexed bonds," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3349-3366, December.
    • Handle: RePEc:eee:jbfina:v:30:y:2006:i:12:p:3349-3366
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    1. Maurice Obstfeld and Giovanni Peri., 1998. "Regional Nonadjustment and Fiscal Policy: Lessons for EMU," Center for International and Development Economics Research (CIDER) Working Papers C98-096, University of California at Berkeley.
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    5. Eduardo Borensztein & Olivier D Jeanne & Paolo Mauro & Jeronimo Zettelmeyer & Marcos d Chamon, 2005. "Sovereign Debt Structure for Crisis Prevention," IMF Occasional Papers 237, International Monetary Fund.
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    7. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
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    10. Márcio Gomes Pinto Garcia & Roberto Rigobon, 2004. "A Risk Management Approach to Emerging Market’s Sovereign Debt Sustainability with an Application to Brazilian Data," Textos para discussão 484, Department of Economics PUC-Rio (Brazil).
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    Cited by:

    1. Luca A Ricci & Marcos d Chamon & Alejo Costa, 2008. "Is There a Novelty Premium on New Financial Instruments? The Argentine Experience with GDP-Indexed Warrants," IMF Working Papers 08/109, International Monetary Fund.
    2. Martin Brooke & Rhys R. Mendes & Alex Pienkowski & Eric Santor, 2013. "Sovereign Default and State-Contingent Debt," Discussion Papers 13-3, Bank of Canada.
    3. Diaw, Abdou & Bacha, Obiyathulla Ismath & Lahsasna, Ahcene, 2014. "Public Sector Funding and Debt Management: A Case for GDP-Linked Ṣukūk," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 22, pages 185-216.
    4. Juan Carlos Hatchondo & Leonardo Martinez, 2012. "On the benefits of GDP-indexed government debt: lessons from a model of sovereign defaults," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 139-157.
    5. Juan Carlos Hatchondo & Leonardo Martinez & César Sosa-Padilla, 2016. "Debt Dilution and Sovereign Default Risk," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1383-1422.
    6. Brooke, Martin & Pienkowski, Alex & Mendes, Rhys & Santor, Eric, 2013. "Financial Stability Paper No 27: Sovereign Default and State-Contingent Debt," Bank of England Financial Stability Papers 27, Bank of England.
    7. Ken Miyajima, 2006. "How to Evaluate GDP-Linked Warrants; Price and Repayment Capacity," IMF Working Papers 06/85, International Monetary Fund.
    8. Achim Wambach & Ines Läufer, 2015. "Europäische Wirtschafts- und Währungsunion: Lernen aus der Krise," Otto-Wolff-Institut Discussion Paper Series 02/2015, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.
    9. Alex Mourmouras & Wolfgang Mayer, 2009. "International Financial Assistance: A Loan Mechanism-Design Approach," Economics and Politics, Wiley Blackwell, vol. 21(1), pages 126-158, March.
    10. Rudra P. Pradhan & Mak B. Arvin & Sara E. Bennett & Mahendhiran Nair & John H. Hall, 2016. "Bond Market Development, Economic Growth and Other Macroeconomic Determinants: Panel VAR Evidence," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 23(2), pages 175-201, June.
    11. Diaw, Abdou & Bacha, Obiyathulla Ismath & Lahsasna, Ahcene, 2011. "Public Sector Funding and Debt Management: A Case for GDP-Linked Sukuk," MPRA Paper 46008, University Library of Munich, Germany, revised 2011.
    12. repec:fip:fedreq:y:2012:i:2q:p:139-157:n:vol.98no.2 is not listed on IDEAS
    13. Andre Faria, 2006. "Growth-Indexed Bonds in Emerging Markets: a Quantitative Approach," 2006 Meeting Papers 847, Society for Economic Dynamics.
    14. Barr, David & Bush, Oliver & Pienkowski, Alex, 2014. "GDP-linked bonds and sovereign default," Bank of England working papers 484, Bank of England.
    15. World Bank, 2008. "Country Insurance : Reducing Systemic Vulnerabilities in Latin America and the Caribbean," World Bank Other Operational Studies 8010, The World Bank.

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