Maturity, Indebtedness, and Default Risk

Sovereign Risk Contagion

“…and the evolution of the aggregate state (9). Using the first order conditions and envelope conditions for the lenders' problem, one can show that bond prices satisfy…”

“…This model is studied in Yue (2010), but here the risk-free rate is time varying and depends on the evolution of the aggregate states. The recursive problem for the small country takes as given the law of motion of aggregate states (9). Given the individual state (b s , y s , h s ) and aggregate state s, the small country's problem is given by…”

“…, and the law of motion for aggregate states (9). The bargaining weights for borrowing countries depend on the credit standing, θ i = θh i , such that only countries with bad credit and with the option to renegotiate have positive weights.…”

“…We discretize the shocks into a nine-state Markov chain using a quadrature-based procedure (Tauchen and Hussey, 1991). To set the volatility and persistence of this process, we use linearly detrended real GDP for Italy and Spain for the period 1960 to 2015 and set these parameters to be the average 9 Cruces and Trebesch (2013) document multiple renegotiations for some of the default episodes. For these we consider only the final renegotiation of the episode.…”

Credit Risk and Business Cycles

“…Along the lines of Kiyotaki and Moore (1997) and Albuquerque and Hopenhayn (2004), Cooley, Marimon and Quadrini (2005) study the aggregate implications of debt contracts with limited enforcement, Jermann and Quadrini (2009) examine how financial shocks affect the real economy, and Liu, Wang and Zha (2009) propose a quantitatively significant mechanism that amplifies and 2 A similar modelling approach is also applied in the international finance literature on sovereign bonds, although these bonds are different from corporate bonds. See Chatterjee and Eyigungor (2010) and references cited therein.…”