Sovereign debt dynamics with serial defaults
29 Pages Posted: 8 Jun 2021 Last revised: 23 Jun 2021
Date Written: June 5, 2021
This paper introduces serial defaults in the structural model of Jeanneret (2015. Journal of Financial and Quantitative Analysis 50, 963-985). We consider a government that can default multiple times, deciding endogenously the default thresholds and the optimal leverage. Under the extended model, the sovereign credit spreads are higher and carry a positive serial default premium. Model calibration to eight serial defaulting countries suggests that the average market-implied serial default premium is 57.98 basis points and accounts for 16.07% of the total credit spread. The countries with the highest exposure to serial defaults are Argentina, Brazil, Egypt, and Turkey.
Keywords: Sovereign debt, Structural model, Serial defaults, Stock market
JEL Classification: F34, G12, G13
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