Sovereign risk matters: Endogenous default risk and the time-varying volatility of interest rate spreads

Costly Information and Sovereign Risk

“…This alternate calibration can be found in Table 1 as well. It is known that calibrated default models can replicate some of the state‐contingent second‐order dynamics of bond spreads (de Ferra and Mallucci, 2022) as the bond price elasticity is higher in high debt regions. Our model corroborates this finding insofar as the no‐information model offers a CVR at about 2.18.…”

“…de Ferra and Mallucci (2022) recently show that Arellano (2008) in its unaltered form generates endogenous heteroskedasticity in spreads that align with the data for its calibration. The mechanisms behind this, namely, greater bond price elasticity at higher debt levels, is also at work in our model, as is evidenced by the model without information flows generating CVRs that indicate heteroskedasticity.…”

“…This article is also connected to a growing literature on corporate finance, stock returns, and investor information acquisition. Dang et al (2015) and Babenko and Mao (2018) consider optimal security design problems in the financing of a risky investment with information acquisition. Pagano and Volpin (2012) show that issuers of asset-backed securities may choose to release coarse information to enhance primary market liquidity, even if it reduces secondary market liquidity.…”

“…de Ferra and Mallucci (2022) find that sovereign debt models generate some heteroskedasticity naturally as the elasticity of the bond price schedule increases during debt crises.3 Some notable recent exceptions areSeoane (2019) andJohri et al (2022), but these papers explain time-varying volatility in the country risk spread by assuming exogenous time-varying volatility in fundamentals Sedlacek (2020). provides an alternative solution, but it generates time-varying cross-sectional dispersion among firms.…”

The Monetary and Macroeconomic Conditions on Interest Rate Spread: Empirical evidence from Indonesia

“…IRS in developing countries shows significant time volatility (Kim & Stock, 2020;De Ferra & Mallucci, 2022) and higher spread (Tarus & Manyala, 2018). IRS in Indonesia has experienced an increase between 2019 -2021, this is reflected because it is influenced by increased bank reserves in line with credit risk which was still relatively high during the prepandemic period, and during the pandemic, which was due to maintaining the value of Return on Assets (ROA) (Bank Indonesia, 2021).…”