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Sovereign Risk Premia

Nicola Borri

LUISS Guido Carli University - Department of Economics

Adrien Verdelhan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

September 14, 2011

AFA 2010 Atlanta Meetings Paper

Emerging countries tend to default when their economic conditions worsen. If harsh economic conditions in an emerging country correspond to similar conditions for the U.S. investor, then foreign sovereign bonds are particularly risky. We explore how this mechanism impacts the data and influences a general equilibrium model of optimal borrowing and default. Empirically, the higher the correlation between past foreign bond and U.S. market returns, the higher the average sovereign excess returns. In the model, sovereign defaults and bond prices depend not only on the borrowers' economic conditions, but also on the lenders' time-varying risk-aversion.

Number of Pages in PDF File: 52

Keywords: Sovereign debt, Asset pricing, Default risk

JEL Classification: F30, F34, E43

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Date posted: February 17, 2009 ; Last revised: September 14, 2011

Suggested Citation

Borri, Nicola and Verdelhan, Adrien, Sovereign Risk Premia (September 14, 2011). AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1343746 or http://dx.doi.org/10.2139/ssrn.1343746

Contact Information

Nicola Borri
LUISS Guido Carli University - Department of Economics ( email )
viale Romania, 32
Rome, 00197
HOME PAGE: http://docenti.luiss.it/borri/
Adrien Verdelhan (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
Cambridge, MA 02142
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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References:  146
Citations:  14
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