Sovereign Risk Premia

73 Pages Posted: 13 Oct 2011

See all articles by Adrien Verdelhan

Adrien Verdelhan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Nicola Borri

LUISS University - Department of Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 13, 2011

Abstract

Emerging countries tend to default when their economic conditions worsen. If bad times in an emerging country correspond to bad times for the US investor, then foreign sovereign bonds are particularly risky. We explore how this mechanism plays out in the data and in a general equilibrium model of optimal borrowing and default. Empirically, the higher the correlation between past foreign and US bond returns, the higher the average sovereign excess returns. 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.

Suggested Citation

Verdelhan, Adrien and Borri, Nicola, Sovereign Risk Premia (May 13, 2011). Paris December 2011 Finance Meeting EUROFIDAI - AFFI, Available at SSRN: https://ssrn.com/abstract=1943549 or http://dx.doi.org/10.2139/ssrn.1943549

Adrien Verdelhan (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Nicola Borri

LUISS University - Department of Economics and Finance ( email )

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Rome, 00197
Italy

HOME PAGE: http://docenti.luiss.it/borri/

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