Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/81282
Authors: 
Waldenström, Daniel
Year of Publication: 
2006
Series/Report no.: 
IFN Working Paper 677
Abstract: 
Recent theoretical models suggest that the costs governments face when defaulting on their domestic and external debt may differ considerably. This paper examines if this proposed cost difference is reflected in sovereign risk spreads across domestic and foreign markets. Specifically, I analyze market yields on Danish government debt in both Denmark and Sweden during 1938–1948, i.e., a period full of political shocks as well as a wartime segmentation of Scandinavian capital markets. By linking the exogenous wartime shocks to changes in the costs of defaulting on domestic and external sovereign debt, it is found that these costs explain a significant part of the variation in the sovereign risk spread across markets. The result is robust to a multitude of tests and the inclusion of additional yield spread influences such as differences in macroeconomic fluctuations, portfolio allocation opportunities, local risk aversion and microstructure institutions.
Subjects: 
Sovereign Risk
Investor Heterogeneity
Domestic Debt
External Debt
Market Segmentation
Political Economy
Cliometrics
JEL: 
F34
G15
G18
N20
N24
N44
Document Type: 
Working Paper

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