The Premia on State-Contingent Sovereign Debt Instruments

Released on by Deniz Igan
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  • The Premia on State-Contingent Sovereign Debt Instruments Book Detail

  • Author : Deniz Igan
  • Release Date : 2021-12-03
  • Publisher : International Monetary Fund
  • Genre : Business & Economics
  • Pages : 48
  • ISBN 13 : 1616357002
  • File Size : 56,56 MB
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The Premia on State-Contingent Sovereign Debt Instruments by Deniz Igan PDF Summary

Book Description: State-contingent debt instruments such as GDP-linked warrants have garnered attention as a potential tool to help debt-stressed economies smooth repayments over business cycles, yet very few studies of the empirical properties of these instruments exist. This paper develops a general f ramework to estimate the time-varying risk premium of a state-contingent sovereign debt instrument. Our estimation framework applied to GDP-linked warrants issued by Argentina, Greece, and Ukraine reveals three stylized facts: (i) the risk premium in state-contingent instruments is high and persistent; (ii) the risk premium exhibits a pro-cyclical pattern; and (iii) the liquidity premium is higher and more volatile than that for plain-vanilla government bonds issued by the same sovereign. We then present a model in which investors fear ambiguity and that can account for the cyclical properties of the risk premium.

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