default risk and risk averse international investors abstract this paper develops an endogenous default risk model for small open economies that interact with risk averse international investors whose preferences exhibit decreasing absolute risk aversion dara by incorporating risk averse investors who trade with an emerging economy the present model explains a larger proportion and volatility of the spread between sovereign bonds and riskless assets than the standard model with risk neutral investors the paper shows that if investors have dara preferences then the emerging economy s default risk capital flows and bond prices are a function not only of the fundamentals of the economy but also of the level of financial wealth and risk aversion of international investors in particular as investors become wealthier or less risk averse the emerging economy becomes less credit constrained as a result the emerging economy s default risk is lower and its bond prices and capital inflows are higher additionally with risk averse investors the risk premium in the asset prices of the sovereign countries can be decomposed into two components a base premium that compensates the investors for the probability of default and an excess premium that compensates them for taking the risk of default

the sources of sovereign risk a calibration based on levy stochastic processes abstract governments choose to issue risky or riskless debt depending on the nature of the stochastic process of output we use brownian motion and poisson shocks a modeling method in the literature on corporate default known as levy processes to approximate a decomposition of the output process into a smooth and a jump component using an eaton and gersovitz 1981 model of debt repudiation we show that the brownian part explains the counter cyclical behavior of the current account and the poisson part explains the risk of default thus enabling our model to account for key stylized facts regarding sovereign risk

commodity price risk management and fiscal policy in a sovereign default model abstract commodity prices are an important driver of fiscal policy and the business cycle in many developing and emerging market economies we analyze a dynamic stochastic small open economy model of sovereign default featuring endogenous fiscal policy and stochastic commodity revenues the model accounts for a positive correlation of commodity revenues with government expenditures and a negative correlation with tax rates we quantitatively document the extent to which the utilization of different financial hedging instruments by the government contributes to lowering the volatility of different macroeconomic variables and their correlation with commodity revenues an event analysis illustrates how financial hedging instruments moderate fiscal adjustment in response to significant falls in the price of commodities we evaluate the conditional and unconditional welfare gains for the representative household generated by financial derivatives and commodity indexed bonds

news sovereign debt maturity and default risk abstract leading into a debt crisis interest rate spreads on sovereign debt rise before the economy experiences a decline in productivity suggesting that news about future economic developments may play an important role in these episodes an empirical var estimation shows that a news shock has a larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity a quantitative model of news and sovereign debt default with endogenous maturity choice generates impulse responses and a variance decomposition similar to the empirical var estimates the dynamics of the economy after a bad news shock share some features of a productivity shock and some features of sudden stop events however unlike during sudden stop episodes long term debt does not shield the country from bad news shocks and it may even exacerbate default risk finally an increase in the precision of news allows the government to improve its debt maturity management especially during periods of high stress in credit markets and thus face lower yield spreads while increasing the amount of debt

debt maturity without commitment i analyze how lack of commitment afiects the maturity structure of sovereign debt governments balance beneflts of default induced redistribution and costs due to income losses in the wake of a default their choice of short versus longterm debt afiects default and rollover decisions by subsequent policy makers the equilibrium maturity structure is shaped by revenue losses on inframarginal units of debt that re ect the price impact of these decisions the model predicts an interior maturity structure with positive gross positions and a shortening of the maturity structure when debt issuance is high output low or a cross default more likely these predictions are consistent with empirical evidence

default settlement and signalling lending resumption in a reputational model of sovereign debt this paper develops a simple model of sovereign debt in which defaulting nations are excluded from capital markets and regain access by making partial repayments this implication of the model is consistent with the historical evidence that defaulting countries return to international loan markets soon after a settlement but after varying periods of exclusion copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

bankruptcy and delinquency in a model of unsecured debt this article documents and interprets a fact central to the dynamics of informal consumer debt default we observe that for individuals 60 90 days late on payments i 85 make payments during the next quarter and ii 40 reduce their debt to understand these facts we develop a quantitative model of debt delinquency and bankruptcy our model reproduces the dynamics of delinquency and suggests an interpretation of the data in which lenders frequently reset loan terms for delinquent borrowers typically offering partial debt forgiveness instead of a blanket imposition of the penalty rates most unsecured credit contracts specify

evaluating the magnitude and the stakes of peer effects analysing science and math achievement across oecd what follows is an exercise aimed at estimating peer effects impact on science and math test scores of secondary school students surveyed in 1995 by the international education agency across oecd countries it is also to discuss their importance for educational policy particularly regarding the highly sensitive issue of ability grouping using this unique international database this study assesses the magnitude of the peer effect relative to more traditional inputs referring to education policy stakes we control for the presence of increasing or decreasing return this study also checks for cross effects in order to determine whether peer effects matter more to low or high ses pupils and whether their final impact on achievement is affected by the underlying level of heterogeneity within the group using a methodology which a priori accounts for the clustering of the data within countries and schools classrooms i e fixed random effect or hierarchical model our analysis indicates that peer effects are strong determinants of both math and science achievement relative to individual ses and other school inputs the presence of increasing of decreasing returns is not obvious but we find systematic evidence that low ability pupils are more sensitive to peer group characteristics by contrast this study also find that for a given level of the peer effect higher heterogeneity comes at a certain cost in brief these results provide no systematic evidence regarding grouping policies

sovereign debt sustainability in advanced economies we develop a measure of maximum sustainable government debt for advanced economies how much investors are willing to lend to a country s government depends on the country s expected primary surplus the level and volatility of its rate of growth and how much debt the government expects to be able to raise in the future for the purpose of servicing the debt it seeks to raise today we provide a simple formula that computes a country s maximum sustainable debt msd as a function of four easy to estimate parameters we further compute a country s theoretical probability of default pd as a function of its debt to gdp ratio we nally calibrate our measures for 23 oecd countries and test the relation between sovereign yield spreads and our theoretical pd at prevailing debt levels we nd it to be strongly statistically signicant jel h63

the risk in hedge fund strategies theory and evidence from trend followers hedge fund strategies typically generate option like returns linear factor models using benchmark asset indices have difficulty explaining them following the suggestions in glosten and jagannathan 1994 this article shows how to model hedge fund returns by focusing on the popular trend following strategy we use lookback straddles to model trend following strategies and show that they can explain trend following funds returns better than standard asset indices though standard straddles lead to similar empirical results lookback straddles are theoretically closer to the concept of trend following our model should be useful in the design of performance benchmarks for trend following funds

bailouts sovereign risk and bank portfolio choices abstract i study the role of sovereign risk in determining the effects of expected bailouts on banks portfolio decisions empirically data on italian banks show that they decrease lending to firms and increase purchases of government bonds following an increase in the probability of a bailout if the risk of sovereign default is sufficiently low crucially the portfolio adjustment becomes weaker and eventually reverses sign as sovereign risk increases to interpret these results i develop a model in which the relation between the bailout probability and the corresponding payoff to bank owners bailout rents depends on sovereign risk the model s predictions are consistent with the key features of the data

non defaultable debt and sovereign risk abstract we quantify gains from introducing limited financing through non defaultable debt into a model of equilibrium sovereign risk for an initial sovereign spread of 4 2 introducing the possibility of issuing non defaultable debt for up to 10 of aggregate income reduces immediately the spread to 1 5 and implies a welfare gain equivalent to a permanent consumption increase of 0 8 nevertheless the spread reduction achieved by the introduction of non defaultable debt is short lived our findings shed light on different aspects of proposals to introduce common euro area sovereign bonds that could be virtually non defaultable

local characteristics and public production the case of education in a long tradition of papers beginning with borcherding and deacon 5 and bergstrom and goodman 3 local government expenditure is viewed as the outcome of a political process in which the utility of the median voter is maximized subject to an appropriate resource constraint expenditures are specified as a function of the median voter s income the tax price and a set of local characteristics representing the tastes of the jurisdiction s residents the tax price variable incorporates the median voter s tax share and unit costs of providing local public services which depend on input prices and population served local variables though included on the demand side as taste factors are assumed to have no effect on the cost of producing local public services in this paper we ask whether local variables affect production costs directly using california data in which taste factors are virtually eliminated from the demand for education expenditure we find that local variables altect the production of education achievement sign y empirical estimates from median voter models in which local variables are

discretionary monetary and fiscal policy with endogenous sovereign risk abstract how does the presence of sovereign risk affect the conduct of public policy to answer this question this paper studies optimal monetary and fiscal policy without commitment for a model economy with nominal public debt and strategic sovereign default compared to an economy without the possibility of default economies with sovereign risk experience more volatile interest rates which impedes the government s ability to smooth tax rates across states risk of default also limits public debt accumulation reducing the government s incentive to use surprise inflation on average when calibrated to the united states the model predicts that a counterfactual increase in the average annual default probability from 0 to 1 lowers average inflation by 33 raises the standard deviation of inflation by 18 and increases the standard deviation of the labor income tax by 73 the transmission of exogenous shocks to real aggregate quantities is however almost unaffected by the possibility of default for example the presence of sovereign risk would increase the standard deviation of log real gdp by less than 1 in the experiment above similarly the welfare consequences of sovereign risk are found to be of negligible size as well

sovereign and private default risks over the business cycle abstract sovereign debt crises are often accompanied by deep recessions with sharp declines in external credit to the private sector in a sample of emerging economies we find that both sovereign and private interest rate spreads are countercyclical this paper presents a model of a small open economy that accounts for these empirical regularities it includes private firms which finance a fraction of imports by external debt and are subject to idiosyncratic productivity risk and a government which borrows internationally and taxes firms to finance public expenditures the model gives rise to endogenous private and sovereign interest rate spreads and a dynamic feedback mechanism between sovereign and private default risks through the endogenous response of fiscal policy to adverse productivity shocks

debt dilution and sovereign default risk we measure the effects of debt dilution on sovereign default risk and study debt covenants that could mitigate these effects we calibrate a baseline model with endogenous debt duration and default risk in which debt can be diluted using data from spain we find that debt dilution accounts for 78 percent of the default risk in the baseline economy and that eliminating dilution increases the optimal duration of sovereign debt by almost 2 years eliminating dilution also increases consumption volatility but still produces welfare gains the debt covenants we study could help enforcing fiscal rules

self fulfilling debt crises what can monetary policy do this paper examines the potential for monetary policy to avoid self fulfilling sovereign debt crises we combine a version of the slow moving debt crisis model proposed by lorenzoni and werning 2014 with a standard new keynesian model monetary policy could preclude a debt crisis through raising inflation and output and lowering the real interest rate these reduce the real value of outstanding debt and the cost of new borrowing and increase tax revenues and seigniorage we determine the optimal path of inflation required to avoid a self fulfilling debt crisis stronger price rigidity implies more sustained inflation

beliefs and long maturity sovereign debt abstract a novel form of strategic complementarities is explored in a standard quantitative model of long maturity sovereign debt discrepancies in long run beliefs dilute current prices differently negative long run beliefs become self fulfilling if the sovereign optimally borrows more and defaults more frequently in the face of worse prices a strong curvature in the flow utility is an important ingredient in generating this response the intuition bears out both through a multiplicity of markov equilibria and in sunspot equilibria that mimic trigger strategies in repeated games in the benchmark model average spreads are roughly 67 higher 200 basis points and debt to gdp ratios are roughly 9 higher 5 percentage points when beliefs are pessimistic the model also reveals limitations to third party coordination of expectations as a policy tool

consumer bankruptcy a fresh start consumer bankruptcy provides partial insurance against bad luck but by driving up interest rates makes life cycle smoothing more difficult we argue that to assess this trade off one needs a quantitative model of consumer bankruptcy with three key features life cycle component idiosyncratic earnings uncertainty and expense uncertainty exogenous negative shocks to household balance sheets we find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules more persistent shocks make the bankruptcy option more desirable larger transitory shocks have the opposite effect our findings suggest the current us bankruptcy system may be desirable for reasonable parameter values jel d14 d91 k35

welfare implications of the bankruptcy reform act of 1999 abstract in recent years personal bankruptcy has become an important issue to consumers creditors and legislators alike over 40 billion dollars of unsecured debt were discharged in 1998 by 1 44 million households these losses have led legislators to propose a variety of changes in bankruptcy law the most important and recent of which is the bankruptcy reform act of 1999 ba99 i develop a dynamic stochastic general equilibrium model of personal bankruptcy to investigate the trade off between the consumption smoothing role of bankruptcy and the interest rate and deadweight costs it imposes i find that stringent means tests would reduce filing rates only slightly and would have only modest welfare consequences on the other hand the elimination of bankruptcy altogether is found to have substantial benefits this result is robust to income shock persistence and to stringency in the application of means tests

a contraction for sovereign debt models abstract using a dual representation we show that the markov equilibria of the one period bond eaton and gersovitz 1981 incomplete markets sovereign debt model can be represented as a fixed point of a contraction mapping providing a new proof of the uniqueness and existence of equilibrium in the benchmark sovereign debt model the arguments can be extended to incorporate re entry probabilities after default when the shock process is iid our representation of the equilibrium bears many similarities to an optimal contracting problem we use this to argue that commitment to budget rules has no value to a benevolent government we show how the introduction of long term bonds breaks the link to the constrained planning problem

a continuous time model of sovereign debt abstract i construct a continuous time model of strategic default and provide a numerical algorithm that solves it i compare the results and computation times to standard discrete time models of sovereign debt the method proposed here is faster than discrete time computation methods while obtaining similar quantitative results the few differences between the models can all be attributed to a painful deleveraging feature when debt issuance happens at a higher frequency the sovereign faces higher interest rate spreads along the deleveraging process so rolling over its debt becomes more costly this feature leads to a coefficient of variation for interest rate spreads that is higher and closer to the data relative to its discrete time sovereign debt model counterpart calibrated to quarterly frequency i solve three variants of the model the first includes short term maturity bonds only and a constant risk free interest rate the second allows for stochastic fluctuations in the risk free rate finally i extend the model to allow for long term bonds

hedge fund benchmarks information content and biases we discuss the information content and potential measurement biases in hedge fund benchmarks hedge fund indexes built from databases of individual hedge funds inherit the measurement biases in the databases in addition broad based indexes mask the diversity of individual hedge fund return characteristics consequently these indexes provide incomplete information to investors seeking diversification from traditional asset classes through the use of hedge funds the approach to constructing hedge fund benchmarks we propose is based on the simple idea that the most direct way to measure hedge fund performance is to observe the investment experience of hedge fund investors themselves the funds of hedge funds fofs in terms of measurement biases returns of fofs can deliver a cleaner estimate of the investment experience of hedge fund investors than the traditional approach in terms of risk characteristics indexes of fofs are more indicative of the demand side dynamics driven by hedge fund investors p

sovereign defaults information investment and credit abstract why would a sovereign government immune from bankruptcy procedures and with few assets that could be seized in the event of a default ever repay foreign creditors and correspondingly why do foreign creditors lend to sovereigns this paper finds general conditions under which even in the absence of sanctions lending to sovereigns can emerge in a single shot game furthermore it shows that positive borrowing can be sustained both in pooling and separating equilibria in this way it makes clear that neither sanctions nor reputation considerations the two classical explanations are necessary to enforce repayment information revelation is the crucial mechanism for these results the repayment default decision is interpreted as a signal used by the government to communicate information to domestic and foreign agents about the fundamentals of the economy governments repay to affect agents expectations about them a default through its effect on expectations about fundamentals can generate a decline in foreign and domestic investment and a credit crunch in domestic credit markets governments repay to avoid these costs but may default in equilibrium when hit by a negative shock

margins and hedge fund contagion funding risk measures the extent to which a fund can borrow money by posting collateral using a novel measure of funding risk based on futures margins we are able to empirically identify the mechanism by which changes in funding risk affect the likelihood of contagion an increase in margins of the order of magnitude observed during the subprime crisis increases the probability of contagion among certain types of funds by up to 34 our analysis shows that some types of hedge funds are more vulnerable to contagion than others our results also suggest that policies that limit the magnitude of changes in margins over short periods of time may reduce the likelihood of contagion among hedge funds

efficient sovereign default in this article i show that the key aspects of sovereign debt crises can be rationalized as part of the efficient risk sharing arrangement between a sovereign borrower and foreign lenders in a production economy with informational and commitment frictions the constrained efficient allocation involves ex post inefficient outcomes that resemble sovereign default episodes in the data and can be implemented with non contingent defaultable bonds and active maturity management defaults and periods of temporary exclusion from international credit markets happen along the equilibrium path and are essential to supporting the efficient allocation furthermore during debt crises the maturity composition of debt shifts towards short term debt and the term premium inverts as in the data

examining the link between teacher wages and student outcomes the importance of alternative labor market opportunities and non pecuniary variation researchers using cross sectional data have failed to produce systematic evidence that teacher salaries affect student outcomes these studies generally do not account for non pecuniary job attribu

zero r 2hedge funds and market neutrality factor models yield an r 2 insignificantly different from 0 for one third of hedge funds in a broad sample these funds illustrate the concept of market neutrality and feature lower volatilities higher sharpe ratios and higher alphas than other funds indicating that they provide a successful alternative investment however large portfolios of zero r 2 funds contain fully half the volatility of portfolios of other funds suggesting that they feature substantial systematic risk furthermore these funds display an increased probability of failure even after controlling for idiosyncratic volatility these results indicate the presence of an omitted factor that exposes investors to significant downside risk

are market neutral hedge funds really market neutral one can consider the concept of market neutrality for hedge funds as having breadth and depth breadth resects the number of market risks to which a fund is neutral while depth resects the completeness of the neutrality of the fund to market risks we focus on market neutrality depth and propose ve different neutrality concepts mean neutrality nests the standard correlation based de nition of neutrality variance neutrality value at risk neutrality and tail neutrality all relate to the neutrality of the risk of the hedge fund to market risks finally complete neutrality corresponds to independence of the fund to market risks we suggest statistical tests for each neutrality concept and apply the tests to a combined database of monthly market neutral hedge fund returns from the hfr and tass hedge fund databases we nd that around one quarter of these funds exhibit some signi cant exposure to market risk

can debt crises be self fulfilling abstract several papers argue that debt crises can be the result of self fulfilling expectations that no one will lend to a country triggering default and rationalizing the refusal to lend i show these coordination failures can be eliminated by a combination of state contingent securities and a mechanism that allows investors to promise to lend only if enough other investors do so as well this suggests that runs on the debt of a single borrower such as the government can be eliminated and that self fulfilling features are more plausible when externalities among many decentralized borrowers allow for economy wide debt runs to occur

the failure of stabilization policy balanced budget fiscal rules in the presence of incompressible public expenditures abstract we consider an infinite horizon neoclassical model with a government that i balances its budget at each point in time ii faces unavoidable incompressible public expenditures and iii further uses a fiscal rule for the share of variable government spending in output with the purpose of stabilizing the economy we show that insulating this economy from belief driven fluctuations is not possible if the government finances these two components of public spending using a distortionary proportional income tax in this case we always have steady state multiplicity two steady states and global indeterminacy while local indeterminacy is also possible more precisely even if a sufficiently procyclical share of the variable government spending component in output is still able to eliminate local indeterminacy two saddle steady states prevail so that depending on expectations the economy may either converge to the low steady state or to the high steady state this implies that a regime switching rational expectation equilibrium where the economy switches between paths converging to the two different steady states easily arises as expectations influence long run outcomes our model is able to generate large and sudden expansions and contractions in response to expectation shocks

slow moving debt crises we study slow moving debt crises self fulfilling equilibria where high interest rates due to fears of higher future default leads to a gradual but faster accumulation of debt ultimately validating investors fears we show that slow moving crises arise in a variety of settings both when fiscal policy follows a given rule or when it is chosen by an optimizing government we discuss how multiplicity is avoided for low debt levels for sufficiently responsive fiscal policy rules and for long enough debt maturities when the equilibrium is unique debt dynamics are characterized by a tipping point below which debt fall and stabilizes and above which debt and default rates grow we provide game theoretic foundations for our approach

sovereign debt renegotiation and credit default swaps abstract a credit default swap cds contract provides insurance against default this paper incorporates the contract into a sovereign default model and demonstrates that the existence of a cds market results in lower default probability higher debt levels and lower financing costs for the country uncertainty over the insurance payout when the debt is renegotiated explains why in the data as the output declines the cds spread becomes lower than the bond spread finally my results show that the 2012 cds naked ban that decreased the levels of cds for european countries is a welfare reducing policy

financial integration and international risk sharing abstract conventional wisdom suggests that financial liberalization can help countries insure against idiosyncratic risk there is little evidence however that countries have increased risk sharing despite widespread financial liberalization we show that the key to understanding this puzzling observation is that conventional wisdom assumes frictionless international financial markets while actual markets are far from frictionless financial contracts are incomplete and contract enforceability is limited when countries remove official capital controls default risk is still present as an implicit barrier to capital flows if default risk were eliminated capital flows would be six times greater and international risk sharing would increase substantially

decentralized borrowing and centralized default abstract in the past foreign borrowing by developing countries was comprised almost entirely of government borrowing however private firms and individuals in developing countries now borrow substantially from foreign lenders it is often asserted that this surge in private sector borrowing generates excessive borrowing and frequent sovereign defaults in developing countries this paper analyzes the impact of decentralized borrowing using a quantitative model in which private agents decide how much to borrow and the government decides whether to default relative to a model in which the government determines both the level of borrowing and whether to default decentralized borrowing drives up aggregate credit costs and sovereign default risk and reduces aggregate welfare interestingly decentralized borrowing may lead to either too much or too little debt in equilibrium depending on the severity of default penalties

asset backed contracts and sovereign risk abstract a fundamental problem with sovereign default is the lack of a legal enforcement mechanism since the 1920s there have been an ongoing set of initiatives undertaken by the league of nations and the unctad to set international laws on borrowing and lending standards all of which have failed to address the unenforceability problem this paper proposes to use asset backed contracts where the usufruct of the asset transfers to the asset holder unlike conventional sovereign borrowing there are international laws governing asset backed contracts which allow the international assets of a country to be seized this paper exemplifies on the idea that asset backed contracts which are also widely practiced in islamic finance can provide a solution to unenforceable sovereign debt contracts the paper focuses specifically on argentina which has defaulted twice in 13 years if argentina had utilized asset backed contracts prior to its 2001 debt default it would have gained from the following advantages higher debt to gdp ratios larger welfare gains lower probability of default and thus lower borrowing costs

consumption savings decisions with quasi geometric discounting we study the consumption savings problem of an infinitely lived rational consumer who has time inconsistent preferences in the form of quasi geometric discounting the consumer operates a weakly concave production function and must simply divide current resources into current consumption and savings there is no uncertainty a solution to the consumer s problem is a subgame perfect equilibrium of a dynamic game between the consumer s successive selves we show that this game has a continuum of equilibria in stationary markov strategies not only is the stationary point of the consumer s asset holdings indeterminate but each stationary point has a continuum of dynamic paths converging to it the savings policy rules underlying these dynamic paths are step functions

unique equilibrium in the eaton gersovitz model of sovereign debt abstract a common view of sovereign debt markets is that they are prone to multiple equilibria we prove that to the contrary markov perfect equilibrium is unique in the widely studied model of eaton and gersovitz 1981 and we discuss multiple extensions and limitations of this finding our results show that no improvement in a borrower s reputation for repayment can be self sustaining thereby strengthening the bulow and rogoff 1989 argument that debt cannot be sustained by reputation alone

the flypaper effect and other anomalies abstract i develop a model in which income both in its own right and as a proxy for other socioeconomic characteristics is an input in the production function for local public services the most obvious example is education though there are other applications as well the comparative statics results from this model yield the following results 1 the observed flypaper effect the tendency for local government to spend a higher fraction of unrestricted grants than income of residents may be due at least in part to the fact that own income but not grants is a substitute for purchased inputs in the technology hence the propensity to spend on purchased inputs out of own income is lower than out of grants 2 the income elasticity of demand for public sector output may be higher than the observed income elasticity of demand for purchased inputs 3 equalization of educational opportunity via wealth neutrality as suggested by feldstein requires major changes in education finance once we recognice the distinction between purchased inputs and output

disentangling the demand function from the production function for local public services the case of public safety abstract in this paper we develop a theoretical framework and an econometric model which allow us to separate the effect of income and other socioeconomic variables on the demand for publicly provided goods from their effect on the price of those goods we apply our approach in a study of expenditures for police protection in a cross section of 73 u s cities and counties our results suggest that studies of public expenditures which fail to incorporate community characteristics in production and cost functions can yield very misleading results

hedge fund return dependence model misspecification or liquidity spirals we test whether model misspecification or liquidity spirals primarily explain the observed excess dependence in filtered for economic fundamentals hedge fund index returns and the links between volatility liquidity shocks and hedge fund return clustering evidence supports the model misspecification hypothesis i hedge fund filtered return clustering is symmetric ii filtered short bias fund returns exhibit negative dependence with filtered returns for other hedge fund types iii negative liquidity shocks are associated with clustering in both tails and market volatility subsumes the role of negative liquidity shocks and iv these same patterns appear in size sorted equity portfolios

sovereign debt restructurings preemptive or post default sovereign debt restructurings can be implemented preemptively prior to a payment default we code a comprehensive new dataset and nd that preemptive restructurings i are frequent 38 of all deals 1978 2010 ii have lower haircuts iii are quicker to negotiate and iv see lower output losses to rationalize these stylized facts we build a quantitative sovereign debt model that incorporates preemptive and post default renegotiations the model improves the t with the data and explains the sovereign s optimal choice preemptive restructurings occur when default risk is high ex ante while defaults occur after unexpected bad shocks empirical evidence supports these predictions jel f34 f41 h63

sovereign default and maturity choice abstract this study develops a novel model of endogenous sovereign debt maturity that rationalizes various stylized facts about debt maturity and the yield spread curve first sovereign debt duration and maturity generally exceed one year and co move positively with the business cycle second sovereign yield spread curves are usually non linear and upward sloped and may become non monotonic and inverted during a period of high credit market stress such as a default episode finally output volatility impatience risk aversion and especially sudden stops are key determinants of maturity both in our model and in the data

hedge fund crowds and mispricing recent models and the popular press suggest that large groups of hedge funds follow similar strategies resulting in crowded equity positions that destabilize markets inconsistent with this assertion we find that hedge fund equity portfolios are remarkably independent moreover when hedge funds do buy and sell the same stocks their demand shocks are on average positively related to subsequent raw and risk adjusted returns even in periods of extreme market stress we find no evidence that hedge fund demand shocks are inversely related to subsequent returns our results have important implications for the ongoing debate regarding hedge fund regulation

sovereign credit spreads under good bad governance abstract this paper explores how sovereign credit spreads vary with the level of governance an analysis of 74 countries over the 2001 2016 period shows that sovereign credit default swap cds spreads decrease with government effectiveness particularly in countries exhibiting severe default risk high indebtedness and poor economic conditions we formulate a theoretical explanation for these findings using a structural model in which governments adjust default and debt policies based on their abilities to collect and use fiscal revenues the theory posits that more effective governments have less incentive to default and thus benefit from narrower credit spreads although they may choose higher indebtedness levels

heterogeneous borrowers in quantitative models of sovereign default we extend the model used in recent quantitative studies of sovereign default allowing policymakers of different types to stochastically alternate in power we show that a default episode may be triggered by a change in the type of policymaker in office and that such a default is likely to occur only if there is enough political stability and if policymakers encounter poor economic conditions under high political stability political turnover enables the model to generate a weaker correlation between economic conditions and default decisions a higher and more volatile spread and lower borrowing levels after a default episode

u s consumer bankruptcy choice the importance of general equilibrium effects abstract we study the implications of u s personal bankruptcy rules for resource allocation and welfare our analysis shows that general equilibrium considerations along with bankruptcy chapter choice and production matter crucially for the effects of policy reform contrary to previous work we find that completely eliminating bankruptcy provisions causes significant declines in output and welfare by reducing capital formation and labor input furthermore subjecting chapter 7 filers to means testing as suggested by recent legislative proposals would not improve upon current bankruptcy provisions and at best leave aggregate filings output and welfare unchanged however we do find that an alternative tightening of chapter 7 in the form of lower asset exemptions can increase economic efficiency

the stock of external sovereign debt can we take the data at face value abstract the stock of sovereign debt is typically measured at face value defined as the undiscounted sum of future principal repayments face values are misleading when debts are issued with different contractual forms or maturities in this paper we construct alternative measures of the stock of external sovereign debt for 100 developing countries from 1979 through 2006 that correct for differences in contractual form and maturity we show that our alternative measures 1 paint a very different quantitative and in some cases also qualitative picture of the stock of developing country external sovereign debt 2 often invert rankings of indebtedness across countries which historically defined eligibility for debt forgiveness 3 indicate that the empirical performance of the benchmark quantitative model of sovereign debt deteriorates by roughly 50 once model consistent measures of debt are used 4 show how the spread of aggregation clauses in debt contracts that award creditors voting power in proportion to the contractual face value may introduce inefficiencies into the process of restructuring sovereign debts and 5 illustrate how countries have manipulated their debt issuance to meet fiscal targets written in terms of face values

sovereign risk interbank freezes and aggregate fluctuations abstract this paper shows how spillovers from sovereign risk to banks access to wholesale funding establish a bank sovereign nexus in a dynamic stochastic general equilibrium set up heterogeneous banks give rise to an interbank market where government bonds are used as collateral government borrowing under limited commitment is costly ex ante as bank funding conditions tighten when the quality of collateral drops these spillovers by impeding interbank intermediation lower the penalty from defaulting due to an interbank freeze during a recession and propagate aggregate shocks to the macroeconomy the model is calibrated using greek data and is capable of reproducing stylized facts from the european sovereign debt crisis in an application we show that the ecb s non standard financing operations mitigate the adverse feedback mechanism

long duration bonds and sovereign defaults abstract this paper extends the baseline framework used in recent quantitative studies of sovereign default by assuming that the government can borrow using long duration bonds this contrasts with previous studies which assume the government can borrow using bonds that mature after one quarter we show that when we assume that the government issues bonds with a duration similar to the average duration of sovereign bonds in emerging economies the model generates an interest rate that is substantially higher and more volatile than the one obtained assuming one quarter bonds this narrows the gap between the predictions of the model and the data which indicates that the introduction of long duration bonds may be a useful tool for future research about emerging economies our analysis is also relevant for the study of other credit markets

income inequality and sovereign default abstract in this paper we study how income inequality matters for government borrowing and default decisions we extend a standard endogenous sovereign debt default model to allow for heterogeneous agents and stochastic variability in the dispersion of income we calibrate the model to match a number of stylized facts for argentina we show that i rising income inequality within a country increases the probability of default significantly ii the effect of output shocks is larger than the effect of inequality shocks iii the joint effect of these two shocks can generate a high default probability consistent with the argentine data iv the model can match the high volatility of consumption by the poor relative to the rich and v more progressive income taxes lead to lower default risk

fiscal rules and government borrowing costs international evidence we find that the adoption of numerical fiscal rules reduces government borrowing costs in a sample of 101 advanced and developing countries for 1985 2010 we apply a variety of propensity score matching methods to address the self selection problem of policy adoption and find strong evidence that fiscal rules have large and significant treatment effects on lowering government borrowing costs in both international and domestic financial markets the results are robust to changes in country sample and alternative estimation methodology and are consistent with fiscal rules helping to build policy credibility by reducing the probability of default and the risk premium on government debt that compensates lenders for this possibility jel e43 g12 h60

sovereign default interest rates and political uncertainty in emerging markets abstract a large body of the empirical literature shows that high turnover rates length of tenure of policymakers and the degree of conflict within a country affects sovereign spreads debt and default rates we help to rationalize such claims by including these political features in a dynamic stochastic small open economy model of sovereign debt and default in this way we offer a complementary approach to the econometric analyses in the literature consistent with the data the quantitative analysis shows that politically unstable and more polarized economies experience higher default rates and larger level and volatility of sovereign interest rate spreads

hedge fund risk dynamics implications for performance appraisal accurate appraisal of hedge fund performance must recognize the freedom with which managers shift asset classes strategies and leverage in response to changing market conditions and arbitrage opportunities the standard measure of performance is the abnormal return defined by a hedge fund s exposure to risk factors if exposures are assumed constant when in fact they vary through time estimated abnormal returns may be incorrect we employ an optimal changepoint regression that allows risk exposures to shift and illustrate the impact on performance appraisal using a sample of live and dead funds during the period january 1994 through december 2005