1,721,006 research outputs found
Risk premia in long-duration sovereign bonds
No full textIn this paper I develop a model of sovereign lending with default and long-duration coupon
bonds. Long-duration bonds offer an insurance benefit to the borrower because countries are not
required to frequently roll-over outstanding debt. However, investors anticipate that countries
might default in the future and ask for returns that compensate for this risk. In this framework, I
find that bonds with longer duration offer higher interest rate spreads. Bonds issued by countries
that are more likely to receive negative income shocks when investors’ consumption is low have
significantly higher interest rate spreads because investors anticipate defaults many periods into
the futur
Local currency systemic risk
Get PDFEmerging country governments increasingly issue local currency denominated bonds and foreign investors have been increasing their holdings of these assets. By issuing debt denominated in local currency, emerging country governments eliminate exchange rate risk. The growing stock of local currency government debt in the financial portfolios of foreign investors increases their diversification and exposure to fast growing economies. In this paper, we highlight some of the risks associated to this recent trend. First, we adopt the CoV aR risk-measure to estimate the vulnerability of individual countries to systemic risk in the market for local currency government debt. Second, we show that our country-level estimates of vulnerability increase with the share of local currency debt held by foreign investors. A version of the old adage "When New York sneezes, London catches a cold," used often to describe the relationship between the stock markets in these two cities, still applies between individual emerging countries and the aggregate market for local currency government debt
The Market Price of Sovereign Risk
No full textThe market price of sovereign risk is higher than its counterpart and time-varying, increasing in times of high asset volatility. A two-factor model accounts for the cross-section of average bond excess returns in emerging markets
The COVID-19 Challenge to European Financial Markets: lessons from Italy
Get PDFThe COVID-19 pandemic has sickened more than 10 million people around the world and killed at least 500,000. In this chapter, we focus on the experience of Italy, which is the first country hit by the virus in Europe. While the lockdown measures appear to have successfully contained the virus, the economic consequences have been very severe. Policy makers should study the Italian experience to evaluate the cost-benefit effectiveness of different policies in containing the pandemic
The Housing Cost Disease
No full textWe use a simple two-sector, life-cycle economy with bequests to explain the increasing wealth to income ratio, housing wealth and wealth inequality that have been observed in several countries over the long-run as a consequence of a rising labor efficiency in manufacturing (housing cost disease). When consumption inequality across households is sufficiently large, the housing cost disease has adverse effects on a measure of social welfare based on an egalitarian principle: the higher the housing's value appreciation, the lower the welfare benefit of a rising labor efficiency in manufacturing
Sovereign Risk Premia
No full textEmerging countries tend to default when their economic conditions worsen. If harsh economic conditions in an emerging country correspond to similar conditions for the U.S. investor, then foreign sovereign bonds are particularly risky. We explore how this mechanism impacts the data and influences a model of optimal borrowing and default. Empirically, the higher the correlation between past foreign bond and U.S. market returns, the higher the average sovereign excess returns. The market price of sovereign risk appears in line with its corporate counterpart. In the model, sovereign defaults and bond prices depend not only on the borrowers' economic conditions, but also on the lenders' time-varying risk aversion
La gestione finanziaria delle compagnie vita nell’era dei bassi tassi di interesse
No full textLe scelte relative alla combinazione di attività e passività sono cruciali per gli assicuratori vita. Tali decisioni dipendono da un insieme complesso di fattori economici e istituzionali. I vincoli imposti dalle autorità di regolamentazione finanziaria e le condizioni prevalenti sui mercati finanziari sono tra i più importanti. Da questo punto di vista, le complessità dell'attuale contesto normativo e le problematiche associate ai bassi livelli di tassi di interesse di mercato rappresentano sfide significative per gli assicuratori attivi nel comparto vita. Analizzando empiricamente le relazioni tra i lati dell'attivo e del passivo dei loro bilanci, noi ci focalizziamo sugli effetti del trend decrescente dei tassi di mercato sulle decisioni di asset-liability management (ALM) delle principali compagnie vita europee
Sensitivity, Moment Conditions, and the Risk-free Rate in Yogo (2006)
Get PDFIn this paper we show that results presented in the seminal
paper by Yogo, A Consumption Based Explanation of Expected
Stock Returns, cannot be replicated. We find different estimates
for the parameters and we obtain values of over-identified
statistics that being much larger than those in the original paper
indicate rejection of the durable consumption asset pricing
model. By careful inspection of Yogo’s replication files, we
were able to track down the inconsistency to a coding bug. The
rejection of the durable model is exemplified by its inability
to simultaneously explain the risk-free rate and excess stock
returns
Breakup and Default Risks in the Great Lockdown
No full textIn this paper, we exploit CDS quotes for contracts denominated in different currencies and with different default clauses to estimate the risk of a breakup of the Eurozone and the propagation of breakup and default risks after the COVID-19 shock. Our main result is that the risk of a Eurozone breakup is significant although, quantitatively, it is not larger than in the period before the COVID-19 shock. In addition, we find that an increase in the redenomination risk in one country is associated with an increase in default premia and bond spreads in other Eurozone countries. Finally, we find that a sizeable fraction of the changes in the cost of insuring against redenomination and default reflects two additional factors: the first captures the insurance cost against a euro depreciation conditional on redenomination, while the second captures liquidity premia
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