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Default and the Maturity Structure in Sovereign Bonds

Listed author(s):
  • Ananth Ramanarayanan

    (Federal Reserve Bank of Dallas)

  • Cristina Arellano

    (University of Minnesota)

We build a dynamic model of international borrowing and default that can rationalize the dynamics of spread and the maturity composition of debt in the data. The spread curve reflects the dynamics of the endogenous probability of default that is persistent yet mean reverting because of the dynamics of debt and output. Long term debt is beneficial because it can hedge against variations in short rates that are negatively related to consumption. The maturity composition of debt reflects the time variation in the hedging properties of long term debt and respond to a time varying supply of credit that endogenously becomes stringent when default probabilities are high, especially for long debt. When calibrated to data from Brazil, the model matches quantitatively the dynamics of the spread curve and the volatility and maturity composition of new debt issuances.

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File URL: https://economicdynamics.org/meetpapers/2008/paper_479.pdf
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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 479.

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Date of creation: 2008
Handle: RePEc:red:sed008:479
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/society.htm
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