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News, sovereign debt maturity, and default risk

Author

Listed:
  • Maximiliano Dvorkin
  • Juan M. Sanchez
  • Horacio Sapriza
  • Emircan Yurdagul

Abstract

Leading into a debt crisis, interest rate spreads on sovereign debt rise before the economy experiences a decline in productivity, suggesting that news about future economic developments may play an important role in these episodes. In a VAR estimation, a news shock has a larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity. A quantitative model of news and sovereign debt default with endogenous maturity choice generates impulse responses and a variance decomposition similar to the empirical VAR estimates. The dynamics of the economy after a bad news shock share some features of a productivity shock and others of sudden stop events. However, unlike episodes of sudden stops, long-term debt does not shield the country from bad news shocks, and it may even exacerbate default risk. Finally, an increase in the precision of news allows the government to improve its debt maturity management, especially during periods of high stress in credit markets, and thus face lower yield spreads while increasing the amount of debt.

Suggested Citation

  • Maximiliano Dvorkin & Juan M. Sanchez & Horacio Sapriza & Emircan Yurdagul, 2018. "News, sovereign debt maturity, and default risk," Working Papers 2018-033, Federal Reserve Bank of St. Louis, revised 18 May 2020.
  • Handle: RePEc:fip:fedlwp:2018-033
    DOI: 10.20955/wp.2018.033
    Note: Title of previous version: News, Country Risk, and Sovereign Default.
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    References listed on IDEAS

    as
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Have you heard the news? News can affect markets : The effects of economic news on expectations of future financial performance
      by ? in FRED blog on 2020-01-27 14:00:00

    More about this item

    Keywords

    Spreads; Sovereign Debt; Maturity; Default; Country Risk; Crises; News;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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