Sovereign debt maturity structure under asymmetric information

Diego Perez

    Research output: Contribution to journalArticle

    Abstract

    This paper studies the optimal choice of sovereign debt maturity when investors are unaware of the government's willingness to repay. Under a pooling equilibrium there is a wedge between the borrower's true default risk and the default risk priced in debt, and its size differs with the maturity of debt. Safe borrowers tilt their debt maturity towards short-term – relative to the optimal choice under perfect information – since long-term debt pools more default risk that is not inherent to them. Risky borrowers mimic their behavior of safe borrowers to preclude the market from identifying their type. In times of financial distress, spreads increase and the default risk wedge of long-term debt relative to short-term debt increases, which makes borrowers shorten their debt maturity. Data on bond issuances for a panel of countries show that, consistent with the model, maturities co-vary negatively with spreads and that this co-movement is stronger in those situations in which informational asymmetries are larger.

    Original languageEnglish (US)
    Pages (from-to)243-259
    Number of pages17
    JournalJournal of International Economics
    Volume108
    DOIs
    StatePublished - Sep 1 2017

    Fingerprint

    Asymmetric information
    Debt maturity structure
    Sovereign debt
    Default risk
    Debt maturity
    Debt
    Long-term debt
    Comovement
    Government
    Maturity model
    Informational asymmetry
    Willingness
    Perfect information
    Maturity
    Short-term debt
    Financial distress
    Investors
    Pooling equilibrium

    Keywords

    • Asymmetric information
    • Maturity structure
    • Sovereign debt

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

    Cite this

    Sovereign debt maturity structure under asymmetric information. / Perez, Diego.

    In: Journal of International Economics, Vol. 108, 01.09.2017, p. 243-259.

    Research output: Contribution to journalArticle

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