Sovereign debt dynamics with serial defaults

29 Pages Posted: 8 Jun 2021 Last revised: 23 Jun 2021

See all articles by Alexandros Bougias

Alexandros Bougias

Athens University of Economics and Business - Department of Accounting and Finance

Athanasios Episcopos

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: June 5, 2021

Abstract

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

Suggested Citation

Bougias, Alexandros and Episcopos, Athanasios, Sovereign debt dynamics with serial defaults (June 5, 2021). Available at SSRN: https://ssrn.com/abstract=3860762 or http://dx.doi.org/10.2139/ssrn.3860762

Alexandros Bougias (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Athanasios Episcopos

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece
+30 21 0820 3364 (Phone)
+30 21 0822 8816 (Fax)

HOME PAGE: http://www.aueb.gr/users/episcopos

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