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The Premia on State-Contingent Sovereign Debt Instruments
Author:
Ms. Deniz O Igan
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https://orcid.org/0000-0002-9501-1807
,
Mr. Taehoon Kim
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, and
Antoine Levy
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Series:
IMF Working Papers
Volume/Issue:
Volume 2021: Issue 282
Language:
English
Publication Date:
03 Dec 2021
DOI:
https://doi.org/10.5089/9781616357009.001
ISBN:
9781616357009
ISSN:
1018-5941
Pages:
48
Keywords:
State-contingent debt instruments; GDP-linked warrants; Risk premia; Procyclicality; liquidity premium; GDP-linked warrant; estimation framework; SCDI premium; Sovereign bonds; Securities; Bonds; Liquidity; Debt restructuring; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund