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Sovereign Risk Premia

52 Pages Posted: 17 Feb 2009 Last revised: 14 Sep 2011

Nicola Borri

LUISS University - Department of Economics and Finance

Adrien Verdelhan

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

Multiple version iconThere are 2 versions of this paper

Date Written: September 14, 2011

Abstract

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.

Keywords: Sovereign debt, Asset pricing, Default risk

JEL Classification: F30, F34, E43

Suggested Citation

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

Nicola Borri

LUISS University - Department of Economics and Finance ( email )

viale Romania, 32
Rome, 00197
Italy

HOME PAGE: http://docenti.luiss.it/borri/

Adrien Verdelhan (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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