Default Premium
IMF Working Papers, July 21, 2015
Source details
- Canonical URL
- Default Premium
Other formats
Bibliographic details
- Authors: Luis Catão, Rui Mano
- Published: July 21, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513523507.001
Summary and objective
- Re-assesses the view that sovereigns with a history of default are charged only a small and/or short-lived premium on the interest rate warranted by observed fundamentals.
- Introduces and applies a metric of the “default premium” (DP) that is consistent with asymmetric information models and nests previous metrics.
- Applies the DP metric to a broader dataset relative to earlier studies.
Methodology and scope
- Metric: a DP measure consistent with asymmetric information models and encompassing prior metrics (described in the Working Paper).
- Data coverage: two historical samples highlighted:
- 1870-1938
- 1970-2011
- Publication details:
- Pages: 57
- Volume: 2015
- Issue: 167
- Series: Working Paper No. 2015/167
- DOI: https://doi.org/10.5089/9781513523507.001
- Stock No: WPIEA2015167
- ISBN: 9781513523507
- ISSN: 1018-5941
Key quantitative findings
- 1870-1938 sample:
- DP averaged 250 bps upon market re-entry.
- DP tapered to around 150 bps five years out.
- 1970-2011 sample:
- DP averaged about 400 bps upon market re-entry.
- DP tapered to about 200 bps five years out.
- Within five years of market re-entry, the DP can account for as much as 60% of the sovereign spread.
- The DP rises with market exclusion spells.
Robustness and ancillary results
- Estimates are robust to many controls, including controls on actual haircuts.
- Findings help reconcile theory and evidence regarding:
- Why sovereign defaults are infrequent.
- Why earlier debt settlements are desirable.
Subject coverage and keywords
- Subjects: Asset and liability management; Credit; Debt default; Debt settlement; Emerging and frontier financial markets; External debt; Financial markets; Money; Public debt.
- Keywords: Country Risk; Credit; Debt default; Debt settlement; default premium; default premium variable; DP estimate; Emerging and frontier financial markets; Emerging Markets; exclusion spell; Global; Haircut; interest rate; Interest Rate Spread; market access; market exclusion; market re-entry; repayment decision; settlement dummy; Sovereign Debt; WP.
Source: IMF Working Paper "Default Premium" by Luis Catão and Rui Mano, July 21, 2015 (Working Paper No. 2015/167; DOI: https://doi.org/10.5089/9781513523507.001).
Content in this bundle
- Default Premium; by Luís A. V. Catão and Rui C. Mano; IMF Working Paper No. 15/167; July 1, 2015