Default risk and risk averse international investors

• 成果类型: Article
• 署名作者: Valentina Lizarazo, Sandra
• 署名单位: Universidad Carlos III de Madrid
• 刊物名称: JOURNAL OF INTERNATIONAL ECONOMICS
• ISSN/ISSBN: 0022-1996
• DOI: 10.1016/j.jinteco.2012.08.006
• 发表日期: 2013
• 页码: 317-330
• 关键词: Sovereign default; International investors; risk aversion

摘要

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. (C) 2012 Elsevier B.V. All rights reserved.