Long-Duration Bonds and Sovereign Defaults (Revised July 2009)

FRB Richmond Working Paper No. 08-2R

31 Pages Posted: 11 Dec 2012

See all articles by Juan Carlos Hatchondo

Juan Carlos Hatchondo

Indiana University Bloomington

Leonardo Martinez

International Monetary Fund (IMF) - IMF Institute

Date Written: July 21, 2009

Abstract

This paper extends the baseline framework used in recent quantitative studies of sovereign default by assuming that the government can borrow using long-duration bonds. This contrasts with previous studies, which assume the government can borrow using bonds that mature after one quarter. We show that, when we assume that the government issues bonds with a duration similar to the average duration of sovereign bonds in emerging economies, the model generates an interest rate that is substantially higher and more volatile than the one obtained assuming one-quarter bonds. This narrows the gap between the predictions of the model and the data, which indicates that the introduction of long-duration bonds may be a useful tool for future research about emerging economies. Our analysis is also relevant for the study of other credit markets.

Keywords: sovereign default, endogenous borrowing constraints, bond duration, debt dilution, Markov Perfect Equilibrium

JEL Classification: F34, F41

Suggested Citation

Hatchondo, Juan Carlos and Martinez, Leonardo, Long-Duration Bonds and Sovereign Defaults (Revised July 2009) (July 21, 2009). FRB Richmond Working Paper No. 08-2R, Available at SSRN: https://ssrn.com/abstract=2187910 or http://dx.doi.org/10.2139/ssrn.2187910

Juan Carlos Hatchondo (Contact Author)

Indiana University Bloomington ( email )

Dept of Biology
100 South Indiana Ave.
Bloomington, IN 47405
United States

Leonardo Martinez

International Monetary Fund (IMF) - IMF Institute ( email )

700 19 th Street NW
Washington, DC 20431
United States

HOME PAGE: http://works.bepress.com/leonardo_martinez/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
109
Abstract Views
734
Rank
450,735
PlumX Metrics