Country Insurance Using Financial Instruments

36 Pages Posted: 19 Jul 2011

See all articles by Marcos Chamon

Marcos Chamon

International Monetary Fund (IMF) - Research Department

Y. Sophia Zhang

International Monetary Fund (IMF)

Luca Antonio Ricci

affiliation not provided to SSRN

Date Written: July 2011

Abstract

The availability of financial instruments related to indices that track global financial conditions and risk appetite can potentially offer countries alternative options to insure against external shocks. This paper shows that while these instruments can explain much of the in-sample variation in borrowing spreads, this fails to materialize in hedging strategies that work well out-of-sample during tranquil times. However, positions on instruments such as those tracking the US High Yield Spread, the VIX, and especially other emerging market CDS spreads can substantially offset adverse movements in own spreads during times of systemic crises. Moreover, high risk countries seem to gain more, as their underlying weaknesses makes them more vulnerable to external shocks. Overall, the limited value in tranquil times, coupled with political economy arguments and innovation costs could justify the limited interest for this type of hedging in practice

Suggested Citation

Chamon, Marcos and Zhang, Y. Sophia and Ricci, Luca Antonio, Country Insurance Using Financial Instruments (July 2011). IMF Working Paper No. 11/169, Available at SSRN: https://ssrn.com/abstract=1888912

Marcos Chamon (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-5867 (Phone)

Y. Sophia Zhang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Luca Antonio Ricci

affiliation not provided to SSRN

No Address Available

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