Sovereign risk matters: endogenous default risk and the time-varying volatility of interest rate spreads
Emerging markets’ interest rate spreads display substantial time-varying volatility. We show that models with endogenous sovereign default risk à la Eaton and Gersovitz (1981) can account for such volatility, even in the absence of shocks to the second moments of the exogenous stochastic variables....
| Main Authors: | , |
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| Format: | Journal article |
| Language: | English |
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Elsevier
2021
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| _version_ | 1797109004289179648 |
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| author | de Ferra, S Mallucci, E |
| author_facet | de Ferra, S Mallucci, E |
| author_sort | de Ferra, S |
| collection | OXFORD |
| description | Emerging markets’ interest rate spreads display substantial time-varying volatility. We show that models with endogenous sovereign default risk à la Eaton and Gersovitz (1981) can account for such volatility, even in the absence of shocks to the second moments of the exogenous stochastic variables. In particular, these models feature a key non-linearity that allows them to replicate the stochastic volatility of interest rate spreads and its comovement with other important economic variables. Volatility correlates positively with the level of the spreads and the trade balance, negatively with output and consumption. Hence, sovereign default models endogenize the stochastic volatility of interest rates observed in emerging market economies. |
| first_indexed | 2024-03-07T07:35:55Z |
| format | Journal article |
| id | oxford-uuid:14badc51-a93f-4535-ae4b-2ab95cb1b121 |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-03-07T07:35:55Z |
| publishDate | 2021 |
| publisher | Elsevier |
| record_format | dspace |
| spelling | oxford-uuid:14badc51-a93f-4535-ae4b-2ab95cb1b1212023-03-15T14:50:59ZSovereign risk matters: endogenous default risk and the time-varying volatility of interest rate spreadsJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:14badc51-a93f-4535-ae4b-2ab95cb1b121EnglishSymplectic ElementsElsevier2021de Ferra, SMallucci, EEmerging markets’ interest rate spreads display substantial time-varying volatility. We show that models with endogenous sovereign default risk à la Eaton and Gersovitz (1981) can account for such volatility, even in the absence of shocks to the second moments of the exogenous stochastic variables. In particular, these models feature a key non-linearity that allows them to replicate the stochastic volatility of interest rate spreads and its comovement with other important economic variables. Volatility correlates positively with the level of the spreads and the trade balance, negatively with output and consumption. Hence, sovereign default models endogenize the stochastic volatility of interest rates observed in emerging market economies. |
| spellingShingle | de Ferra, S Mallucci, E Sovereign risk matters: endogenous default risk and the time-varying volatility of interest rate spreads |
| title | Sovereign risk matters: endogenous default risk and the time-varying volatility of interest rate spreads |
| title_full | Sovereign risk matters: endogenous default risk and the time-varying volatility of interest rate spreads |
| title_fullStr | Sovereign risk matters: endogenous default risk and the time-varying volatility of interest rate spreads |
| title_full_unstemmed | Sovereign risk matters: endogenous default risk and the time-varying volatility of interest rate spreads |
| title_short | Sovereign risk matters: endogenous default risk and the time-varying volatility of interest rate spreads |
| title_sort | sovereign risk matters endogenous default risk and the time varying volatility of interest rate spreads |
| work_keys_str_mv | AT deferras sovereignriskmattersendogenousdefaultriskandthetimevaryingvolatilityofinterestratespreads AT malluccie sovereignriskmattersendogenousdefaultriskandthetimevaryingvolatilityofinterestratespreads |