The Premia on State-Contingent Sovereign Debt Instruments

By Deniz O Igan, Taehoon Kim, Antoine Levy

December 3, 2021

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

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DOI:

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Issue:

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Series:

Working Paper No. 2021/282
Stock No:

WPIEA2021282
ISBN:

9781616357009
ISSN:

1018-5941

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