Self-fulfilling crises with default and devaluation

Rocha, José María Da; Giménez, Eduardo L.; Lores, Francisco-Xavier

doi:10.1007/s00199-012-0702-6

Cited by 20 publications

(16 citation statements)

References 17 publications

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“…In addition, a new theoretical literature has been trying to answer the question of when a country would choose to explicitly default on debt denominated in its own currency. Papers in this literature, including Aguiar et al (2013), Araujo et al (2013), Corsetti and Dedola (2013), Da-Rocha et al (2012) and Jeanne (2012), present theoretical models where a sovereign might find it optimal to default on local currency debt. These papers, and the rest of the literature, are missing an empirical measure of the credit risk on these local currency bonds.…”

Section: Recent Work By Carmen Reinhart and Kenneth Rogoff Demonstratesmentioning

confidence: 99%

Local Currency Sovereign Risk

Schreger

2013

internationalfinance

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Do governments default on debt denominated in their own currency? We introduce a new measure of sovereign credit risk, the local currency credit spread, defined as the spread of local currency bonds over the synthetic local currency risk-free rate constructed using cross currency swaps. We find that local currency credit spreads are positive and sizable. Compared with credit spreads on foreign currency denominated debt, local currency credit spreads have lower means, lower crosscountry correlations, and are less sensitive to global risk factors. Global risk aversion and liquidity factors can explain more time variation in these credit spread differentials than macroeconomic fundamentals.

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Section: Recent Work By Carmen Reinhart and Kenneth Rogoff Demonstratesmentioning

confidence: 99%

Local Currency Sovereign Risk

Schreger

2013

internationalfinance

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“…The existing asset pricing literature helps us understand credit spread differentials in the presence of financial market frictions, which includes works on liquidity (i.e., Chen, Lesmond, and Wei, 2007 and Bao, Pan, and Wang, 2011), short-selling constraints (i.e., Miller, 1977 andDuffie, Garleanu, andPedersen, 2002), market segmentation (i.e., Gromb andVayanos, 2002 andGreenwood andVayanos, 2014) and slow-moving capital (i.e., Shleifer andVishny, 1997 andDuffie, 2010). Finally, our empirical LC credit risk measure is useful for recent theoretical work on optimal LC default, including Aguiar, Amador, Farhi, and Gopinath (2013) Araujo, Leon, and Santos (2013) and Corsetti and Dedola (2013), Da-Rocha, Gimenez, and Lores (2012).…”

Section: Introductionmentioning

confidence: 96%

Local Currency Sovereign Risk

Schreger

2013

SSRN Journal

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We introduce a new measure of emerging market sovereign credit risk: the local currency credit spread, defined as the spread of local currency bonds over the synthetic local currency risk-free rate constructed using cross-currency swaps. We find that local currency credit spreads are positive and sizable. Compared with credit spreads on foreign currencydenominated debt, local currency credit spreads have lower means, lower crosscountry correlations, and are less sensitive to global risk factors. We discuss several major sources of credit spread differentials, including selective default, capital controls, covariance between currency and credit risk, and various financial market frictions.

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“…12 According to Benjamin and Wright (2009), a process of sovereign debt restructuring takes, on average, eight years. 13 Rose (2005) provides a rationale for the loss of output when countries face debt crises. 14 This specification extends the range of debt values that carry positive default premiums, which allows the model to generate higher interest rate spreads, all else being equal (Arellano (2008)).…”

Section: Value Of the Parametersmentioning

confidence: 99%

Sobre el papel de la ayuda financiera en un episodio de default

Cuadra¹,

Ramos‐Francia²,

García-Verdú³

2018

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La serie de Documentos de Investigación del Banco de México divulga resultados preliminares de trabajos de investigación económica realizados en el Banco de México con la finalidad de propiciar el intercambio y debate de ideas. El contenido de los Documentos de Investigación, así como las conclusiones que de ellos se derivan, son responsabilidad exclusiva de los autores y no reflejan necesariamente las del Banco de México.The Working Papers series of Banco de México disseminates preliminary results of economic research conducted at Banco de México in order to promote the exchange and debate of ideas. The views and conclusions presented in the Working Papers are exclusively the responsibility of the authors and do not necessarily reflect those of Banco de México.

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Self-fulfilling crises with default and devaluation

Cited by 20 publications

References 17 publications

Local Currency Sovereign Risk

Local Currency Sovereign Risk

Local Currency Sovereign Risk

Sobre el papel de la ayuda financiera en un episodio de default

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