Sovereign Risk Matters: Endogenous Default Risk and the Time-Varying Volatility of Interest Rate Spreads
Emerging market interest rate spreads display substantial time-varying volatility. We show that a baseline model with endogenous sovereign default risk can account for such volatility, even in the absence of shocks to the second moments of the exogenous stochastic variables. In particular, the model features a key non-linearity that allows it to replicate the stochastic volatility of interest rate spreads and its comovement with other important economic variables. Volatility correlates positively with the level of the spreads and the trade balance, negatively with output and consumption.

Paper available here: www.dropbox.com/s/3c9wcvssh4×3smu/2020807_default_volty_EM2.pdf?dl=0
Date: 12 November 2020, 13:00 (Thursday, 5th week, Michaelmas 2020)
Venue: Held on Zoom
Speaker: Sergio de Ferra (University of Oxford)
Organising department: Department of Economics
Part of: Department of Economics Seminar
Booking required?: Not required
Audience: Members of the University only
Editor: Melis Clark