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Jean-Paul RENNE (Lausanne University, Swiss) "Fiscal Limits and Sovereign Credit Spreads"
Date: 11th of April 2019
Place: Room 3001
Jean-Paul RENNE (Lausanne University, Swiss) “Fiscal Limits and Sovereign Credit Spreads”
Abstract : This paper presents a novel sovereign-credit-risk model aimed at extracting information from the term structure of credit spreads. At the heart of the model lies the fiscal limit, defined as the maximum outstanding debt that can credibly be covered by future government budget surpluses. By predicting how sovereign credit default swaps (CDS) react to changes in fiscal limit ex- pectations, our model allows to back out such expectations from market data. The fiscal limit estimates feature substantial time-variation, between 100% and 300% of GDP. Our results allow us to quantify the non-linear relationship be- tween credit spreads and the fiscal space. Moreover, we obtain sizeable estimates of sovereign credit risk premiums – the components of sovereign spreads that would not exist if agents were risk-neutral.
Co-author : Kevin PALLARA (Lausanne University, Swiss)
Jean-Michel ZAKOIAN (CREST )
CREST and ILB
Address : ENSAE ParisTech
5, avenue Henry Le Chatelier
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