Default and the maturity structure in sovereign bonds

Cristina Arellano and Ananth Ramanarayanan ()

No 410, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: This paper studies the maturity composition and the term structure of interest rate spreads of government debt in emerging markets. In the data, when interest rate spreads rise, debt maturity shortens and the spread on short-term bonds is higher than on long-term bonds. To account for this pattern, we build a dynamic model of international borrowing with endogenous default and multiple maturities of debt. Short-term debt can deliver higher immediate consumption than long-term debt; large long-term loans are not available because the borrower cannot commit to save in the near future towards repayment in the far future. However, issuing long-term debt can insure against the need to roll-over short-term debt at high interest rate spreads. The trade-off between these two benefits is quantitatively important for understanding the maturity composition in emerging markets. When calibrated to data from Brazil, the model matches the dynamics in the maturity of debt issuances and its comovement with the level of spreads across maturities.

Keywords: Bonds; Default (Finance); Debt (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4012 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden
http://www.minneapolisfed.org/research/SR/SR410.pdf
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
Journal Article: Default and the Maturity Structure in Sovereign Bonds (2012)
Working Paper: Default and the maturity structure in sovereign bonds (2008)
Working Paper: Default and the Maturity Structure in Sovereign Bonds (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:410

Access Statistics for this paper

More papers in Staff Report from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Kate Hansel ().