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Loss Aversion and Search for Yield in Emerging Markets Sovereign Debt

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  • Ricardo Sabbadini

Abstract

A decline in international risk-free interest rates decreases emerging markets (EM) sovereign spreads. I show that a quantitative model of sovereign debt and default exhibits this pattern if foreign lenders are loss-averse and have reference dependence. This happens because investors search for yield in risky EM bonds when the risk-free rate is lower than their return of reference

Suggested Citation

  • Ricardo Sabbadini, 2018. "Loss Aversion and Search for Yield in Emerging Markets Sovereign Debt," Working Papers, Department of Economics 2018_16, University of São Paulo (FEA-USP).
    • Handle: RePEc:spa:wpaper:2018wpecon16
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    More about this item

    Keywords

    sovereign spread; search for yield; loss aversion; low interest rate;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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