The Premia On State Contingent Sovereign Debt Instruments
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The Premia on State-Contingent Sovereign Debt Instruments
Author | : Deniz Igan |
Publisher | : International Monetary Fund |
Total Pages | : 48 |
Release | : 2021-12-03 |
Genre | : Business & Economics |
ISBN | : 1616357002 |
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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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