The Premia on State-Contingent Sovereign Debt Instruments /

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 e...

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Bibliographic Details
Main Author: Igan, Deniz
Other Authors: Kim, Taehoon, Levy, Antoine
Format: Journal
Language:English
Published: Washington, D.C. : International Monetary Fund, 2021.
Series:IMF Working Papers; Working Paper ; No. 2021/282
Subjects:
Online Access:Full text available on IMF
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520 3 |a 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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650 7 |a Debt Management  |2 imf 
650 7 |a Debt  |2 imf 
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650 7 |a Sovereign Debt  |2 imf 
700 1 |a Kim, Taehoon. 
700 1 |a Levy, Antoine. 
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