Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/96434
Authors: 
Pouzo, Demian
Presno, Ignacio
Year of Publication: 
2012
Series/Report no.: 
Working Papers, Federal Reserve Bank of Boston 12-11
Abstract: 
This paper studies how foreign investors' concerns about model misspecification affect sovereign bond spreads. We develop a general equilibrium model of sovereign debt with endogenous default wherein investors fear that the probability model of the underlying state of the borrowing economy is misspecified. Consequently, investors demand higher returns on their bond holdings to compensate for the default risk in the context of uncertainty. In contrast with the existing literature on sovereign default, we explain the bond spreads dynamics observed in the data as well as other business cycle features for Argentina, while preserving the default frequency at historical low levels.
Subjects: 
sovereign debt
default risk
model uncertainty
robust control
JEL: 
D81
E21
E32
E43
E34
Document Type: 
Working Paper

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