The Premia on State-Contingent Sovereign Debt Instruments
IMF Working Papers, December 3, 2021
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- The Premia on State-Contingent Sovereign Debt Instruments
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Bibliographic details
- Authors: Deniz O Igan, Taehoon Kim, Antoine Levy
- Published: December 3, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781616357009.001
Overview
- Authors: Deniz O Igan, Taehoon Kim, Antoine Levy
- Publication date: December 3, 2021
- Paper type: IMF Working Papers, Working Paper No. 2021/282
- Core focus: Estimation of the time-varying risk premium of state-contingent sovereign debt instruments, with application to GDP-linked warrants issued by Argentina, Greece, and Ukraine.
Key findings (stylized facts)
- The paper applies a general framework to estimate the time-varying risk premium of a state-contingent sovereign debt instrument and reports three stylized facts:
- (i) the risk premium in state-contingent instruments is high and persistent;
- (ii) the risk premium exhibits a pro-cyclical pattern;
- (iii) the liquidity premium is higher and more volatile than that for plain-vanilla government bonds issued by the same sovereign.
Methodology and empirical scope
- Developed a general framework to estimate time-varying risk premia for state-contingent sovereign debt instruments.
- Empirical application: GDP-linked warrants issued by Argentina, Greece, and Ukraine.
- Emphasis on decomposing premia into risk premium and liquidity premium components and characterizing their dynamics over the business cycle.
Model and interpretation
- Presents a model in which investors fear ambiguity.
- The ambiguity-averse investor model can account for the observed cyclical properties of the risk premium (including pro-cyclicality and persistence).
Subject coverage and keywords
- Subjects: Asset and liability management, Bonds, Debt restructuring, Financial institutions, Liquidity, Securities, Sovereign bonds
- Keywords: Bonds, Debt restructuring, estimation framework, GDP-linked warrant, GDP-linked warrants, Global, Liquidity, liquidity premium, Procyclicality, Risk premia, SCDI premium, Securities, Sovereign bonds, State-contingent debt instruments
Content in this bundle
- Working Paper