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The Bulgarian Foreign and Domestic Debt ??? A No-Arbitrage Macrofinancial View

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  • Vilimir Yordanov

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Abstract

Bulgaria started the transition in the early 90???s with a sovereign default and debt restructuring. Later on, under a strict fiscal discipline, the country succeeded to reduce significantly its debt burden and is currently among the top EU performers in that respect. The current debt outstanding is composed mainly of local currency treasuries issued on the domestic market as well as Eurobonds and Global bonds on the international one. These instruments give rise to two risky spreads - credit and currency. The Currency Board Arrangement and the fixed exchange rate regime the country follows prevent from a discretionary monetary policy and this gives relative stability to the bonds??? yields and the risky spreads. Their financial role starts dominating over any macroeconomic one making them a natural object for investigation with financial engineering tools. The main focus of the paper is an analysis of the informational content of the risky spreads in a multifaceted way from noarbitrage,financial, and macroeconomic points of view.

Suggested Citation

  • Vilimir Yordanov, 2012. "The Bulgarian Foreign and Domestic Debt ??? A No-Arbitrage Macrofinancial View," William Davidson Institute Working Papers Series wp1032, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2012-1032
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    More about this item

    Keywords

    arbitrage; term structure; credit risk; credit spread; currency spread; HJM;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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