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News, sovereign debt maturity, and default risk

Author

Listed:
  • Maximiliano Dvorkin

    (Federal Reserve Bank of St. Louis)

  • Emircan Yurdagul

    (Universidad Carlos III de Madrid)

  • Horacio Sapriza

    (Federal Reserve Board)

  • Juan Sanchez

    (Federal Reserve Bank of St. Louis)

Abstract

Leading into a debt crisis, interest rate spreads on sovereign debt rise before the economy experiences a decline in productivity, suggesting that news may play an important role in these episodes. The empirical evidence also shows that a news shock has a significantly larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity. We develop a quantitative model of news and sovereign debt default with endogenous maturity choice that generates impulse responses very similar to the empirical estimates. The model allows us to interpret the empirical evidence and to identify key parameters. We find that, first, the increase in sovereign yield spreads around a debt crisis episode is due mostly to the lower expected productivity following a bad news shock, and not to the borrowing choices of the government. Second, a shorter debt maturity increases the chance that bad news shocks trigger a debt crisis. Third, an increase in the precision of news allows the government to improve its debt maturity management, especially during periods of high financial stress, and thus face lower spreads and default risk while holding the amount of debt constant.

Suggested Citation

  • Maximiliano Dvorkin & Emircan Yurdagul & Horacio Sapriza & Juan Sanchez, 2019. "News, sovereign debt maturity, and default risk," 2019 Meeting Papers 918, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:918
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    References listed on IDEAS

    as
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    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

    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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