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INTERNATIONAL MONETARY FUND
The Premia on State-Contingent Sovereign Debt Instruments
Deniz Igan, Taehoon Kim, and Antoine Levy
WP/21/282
2021
NOVEMBER
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© 2021 International Monetary Fund
The Premia on State-Contingent Sovereign Debt Instruments
WP/21/282
Deniz Igan, Taehoon Kim and Antoine Levy1
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.
Abstract
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 framework 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.
| JEL Classification Numbers: | H63; G13; E44 |
| Keywords: | State-contingent debt instruments; GDP-linked warrants; Risk premia; Procyclicality |
| Author’s E-Mail Address: | digan@imf.org, tkim@imf.org, levya@mit.edu |
| JEL Classification Numbers: | H63; G13; E44 |
| Keywords: | State-contingent debt instruments; GDP-linked warrants; Risk premia; Procyclicality |
| Author’s E-Mail Address: | digan@imf.org, tkim@imf.org, levya@mit.edu |
We are grateful to Awais Khuhro for research assistance. We thank Myrvin Anthony, Mihnea Constantinescu, Hamid Davoodi, Giovanni Dell’Ariccia, Khalid Elfayoumi, Divya Kirti, Francisco Roch, Francisco Roldan, Stijn Verhelst and participants at the Open Research Seminar at the National Bank of Ukraine for comments and feedback.
