Sovereign Default and the Choice of Maturity

Sanchez, Juan M.; Sapriza, Horacio; Yurdagul, Emircan

doi:10.20955/wp.2014.031

Working Paper

Sovereign Default and the Choice of Maturity

Abstract: This study develops a novel model of endogenous sovereign debt maturity choice that rationalizes various stylized facts about debt maturity and the yield spread curve: first, sovereign debt duration and maturity generally exceed one year, and co-move positively with the business cycle. Second, sovereign yield spread curves are usually non-linear and upward-sloped, and may become non-monotonic and inverted during a period of high credit market stress, such as a default episode. Finally, output volatility, sudden stops, impatience and risk aversion are key determinants of maturity, both in our model and in the data.

JEL Classification: F34; F41; G15;

https://doi.org/10.20955/wp.2014.031