Sovereign default and maturity choice

•Sovereign debt maturity and duration generally exceed a year and move pro-cyclically.•Yield spread curves are typically non-linear and upward-sloped, but may become non-monotonic and inverted near high-default risk episodes.•Output volatility, impatience, risk aversion and especially sudden stops a...

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Bibliographic Details
Published inJournal of monetary economics Vol. 95; pp. 72 - 85
Main Authors Sánchez, Juan M., Sapriza, Horacio, Yurdagul, Emircan
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.05.2018
Subjects
Bond duration
Crises
Default
Finance
Sovereign maturity choice
Spreads
Yield curve
F41
Bond duration
F34
Finance
Yield curve
Sovereign maturity choice
Spreads
G15
Crises
Default
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Summary:•Sovereign debt maturity and duration generally exceed a year and move pro-cyclically.•Yield spread curves are typically non-linear and upward-sloped, but may become non-monotonic and inverted near high-default risk episodes.•Output volatility, impatience, risk aversion and especially sudden stops are key determinants of maturity.•A default model where the sovereign chooses debt maturity rationalizes these stylized facts. This study develops a novel model of endogenous sovereign debt maturity that rationalizes various stylized facts about debt maturity and the yield spread curve: first, sovereign debt duration and maturity generally exceed one year, and co-move positively with the business cycle. Second, sovereign yield spread curves are usually non-linear and upward-sloped, and may become non-monotonic and inverted during a period of high credit market stress, such as a default episode. Finally, output volatility, impatience, risk aversion, and especially sudden stops, are key determinants of maturity, both in our model and in the data.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2018.01.001