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Federal Reserve Bank of St. Louis
Working Papers
News, sovereign debt maturity, and default risk
Maximiliano Dvorkin
Juan M. Sanchez
Horacio Sapriza
Emircan Yurdagul
Abstract

Leading into a debt crisis, interest rate spreads on sovereign debt rise before the economy experiences a decline in productivity, suggesting that news about future economic developments may play an important role in these episodes. In a VAR estimation, a news shock has a larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity. A quantitative model of news and sovereign debt default with endogenous maturity choice generates impulse responses and a variance decomposition similar to the empirical VAR estimates. The dynamics of the economy after a bad news shock share some features of a productivity shock and others of sudden stop events. However, unlike episodes of sudden stops, long-term debt does not shield the country from bad news shocks, and it may even exacerbate default risk. Finally, an increase in the precision of news allows the government to improve its debt maturity management, especially during periods of high stress in credit markets, and thus face lower yield spreads while increasing the amount of debt.


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Download https://doi.org/10.20955/wp.2018.033
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Maximiliano Dvorkin & Juan M. Sanchez & Horacio Sapriza & Emircan Yurdagul, News, sovereign debt maturity, and default risk, Federal Reserve Bank of St. Louis, Working Papers 2018-33, 31 Oct 2018, revised 29 Oct 2019.
More from this series
Note: Title of previous version: News, Country Risk, and Sovereign Default. Forthcoming in the Journal of International Economics.
JEL Classification:
Subject headings:
Keywords: Crises; News; Default; Spreads; Maturity; Country Risk; Sovereign Debt
DOI: 10.20955/wp.2018.033
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