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Federal Reserve Bank of St. Louis
Working Papers
Sovereign Default and the Choice of Maturity
Juan M. Sanchez
Horacio Sapriza
Emircan Yurdagul
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.


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Juan M. Sanchez & Horacio Sapriza & Emircan Yurdagul, Sovereign Default and the Choice of Maturity, Federal Reserve Bank of St. Louis, Working Papers 2014-31, 27 Oct 2014, revised 24 Sep 2017.
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Keywords: Debt Crises; Restructuring; Yield Curves; Bond Duration; Debt Dilution.
DOI: 10.20955/wp.2014.031
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