IMF Working Papers

The Premia on State-Contingent Sovereign Debt Instruments

By Deniz O Igan, Taehoon Kim, Antoine Levy

December 3, 2021

Download PDF

Preview Citation

Format: Chicago

Deniz O Igan, Taehoon Kim, and Antoine Levy. The Premia on State-Contingent Sovereign Debt Instruments, (USA: International Monetary Fund, 2021) accessed November 21, 2024

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.

Summary

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.

Subject: Asset and liability management, Bonds, Debt restructuring, Financial institutions, Liquidity, Securities, Sovereign bonds

Keywords: Bonds, Debt restructuring, Estimation framework, GDP-linked warrant, GDP-linked warrants, Global, Liquidity, Liquidity premium, Procyclicality, Risk premia, SCDI premium, Securities, Sovereign bonds, State-contingent debt instruments

Publication Details

  • Pages:

    48

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2021/282

  • Stock No:

    WPIEA2021282

  • ISBN:

    9781616357009

  • ISSN:

    1018-5941

You May Also Be Interested In...

Guidance Note On The Financing Assurances And Sovereign Arrears Policies And The Fund's Role In Debt Restructurings

November 18, 2024

Colombia: Technical Assistance Report-Report on the Mineral Asset Accounts and Carbon Footprints Mission (May 20–24, 2024)

November 8, 2024

Implementing Board-Endorsed Recommendations From The 2024 External Evaluation Of The Fund’s Independent Evaluation Office (IEO)

November 7, 2024

The Federal Democratic Republic of Ethiopia: First Review Under the Extended Credit Facility Arrangement, Request for Modification of Performance Criteria, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for The Federal Democratic Republic of Ethiopia

November 4, 2024