Template-Type: ReDIF-Paper 1.0
Author-Name: Deniz Igan 
Author-X-Name-First: Deniz  
Author-X-Name-Last: Igan
Author-Name: Taehoon Kim
Author-X-Name-First: Taehoon  
Author-X-Name-Last: Kim
Author-Name: Antoine Levy
Author-X-Name-First: Antoine 
Author-X-Name-Last: Levy 
Title: The premia on state-contingent sovereign debt instruments
Abstract: State-contingent debt instruments such as GDP-linked warrants have garnered attention as a potential tool to help debt-stressed economies smooth repayments over business cycles, yet very few studies of the empirical properties of these instruments exist. This paper develops a general framework to estimate the time-varying risk premium of a state-contingent sovereign debt instrument. Our estimation framework applied to GDP-linked warrants issued by Argentina, Greece, and Ukraine reveals three stylized facts: (i) the risk premium in state-contingent instruments is high and persistent; (ii) the risk premium exhibits a pro-cyclical pattern; and (iii) the liquidity premium is higher and more volatile than that for plain-vanilla government bonds issued by the same sovereign. We then present a model in which investors fear ambiguity and that can account for the cyclical properties of the risk premium.
Length: 50 pages
Creation-Date: 2022-01
File-URL: https://www.bis.org/publ/work988.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work988.htm
File-Format: text/html
Number: 988
Keywords: state-contingent debt instruments, GDP-linked warrants, risk premia, procyclicality
Classification-JEL: H63, G13, E44
Handle: RePEc:bis:biswps:988