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The Premia on State-Contingent Sovereign Debt Instruments

Author

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  • Kim, Taehoon
  • Levy, Antoine

Abstract

State-contingent debt instruments such as GDP-linked warrants have garnered attention as a potential tool to help debt-stressed economies smooth repayments over business cycles, yet very few studies of the empirical properties of these instruments exist. This paper develops a general framework to estimate the time-varying risk premium of a state-contingent sovereign debt instrument. Our estimation framework applied to GDP-linked warrants issued by Argentina, Greece, and Ukraine reveals three stylized facts: (i) the risk premium in state-contingent instruments is high and persistent; (ii) the risk premium exhibits a pro-cyclical pattern; and (iii) the liquidity premium is higher and more volatile than that for plain-vanilla government bonds issued by the same sovereign. We then present a model in which investors fear ambiguity and that can account for the cyclical properties of the risk premium.

Suggested Citation

  • Kim, Taehoon & Levy, Antoine, 2021. "The Premia on State-Contingent Sovereign Debt Instruments," CEPR Discussion Papers 16795, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16795
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    Cited by:

    1. Daniel C. L. Hardy, 2022. "Alternatives in the Design of Sovereign Green Bonds," wiiw Policy Notes 62, The Vienna Institute for International Economic Studies, wiiw.

    More about this item

    Keywords

    State-contingent debt instruments; Gdp-linked warrants; Risk premia; Procyclicality;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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