Showing papers by "Horacio Sapriza published in 2006"

Financially Constrained Stock Returns

Abstract: More financially constrained firms are riskier and earn higher expected returns than less financially constrained firms, although this effect can be subsumed by size and book-to-market. Further, because the stochastic discount factor makes capital investment more procyclical, financial constraints are more binding in economic booms. These insights arise from two dynamic models. In Model 1, firms face dividend nonnegativity constraints without any access to external funds. In Model 2, firms can retain earnings, raise debt and equity, but face collateral constraints on debt capacity. Despite their diverse structures, the two models share largely similar predictions.

Sovereign Default, Terms of Trade and Interest Rates in Emerging Markets

Abstract: Emerging economies tend to experience larger fluctuations in their terms of trade, countercyclical interest rates and more default episodes than developed countries. These structural features might suggest a relevant role for world prices in driving country spreads. This paper studies the role of terms of trade shocks in inducing output fluctuations and countercyclical spreads using a stochastic dynamic general equilibrium model of a small open economy. The model predicts that default incentives and default premia are higher in recessions, as observed in the data. In a quantitative exercise, the model matches various features of emerging economies and can account for the dynamics of default episodes in these markets.

Computing business cycles in emerging economy models

Abstract: We show that computing business cycles in emerging economy models using the discrete state space technique may be misleading. We solve the models of sovereign default presented by Aguiar and Gopinath (2006) using interpolation. We find that the simulated behavior of the spread is quite different from the behavior obtained using discrete state space. In fact, some of the results obtained by Aguiar and Gopinath (2006) using discrete state space are reversed when using interpolation. Our analysis thus provides a new set of benchmark results for quantitative models of sovereign default. ; Updated by Working Paper 09-13

Sovereign Default, Interest Rates and Political Uncertainty in Emerging Markets

Abstract: Emerging economies tend to experience larger political uncertainty and more default episodes than developed countries. This paper studies the effect of political uncertainty on sovereign default and interest rate spreads in emerging markets. The paper develops a quantitative model of sovereign debt and default under political uncertainty in a small open economy. Consistent with empirical evidence, the quantitative analysis shows that higher levels of political uncertainty significantly raise the default frequency and both the level and volatility of the spreads. When parties borrow from international credit markets, the presence of political uncertainty induces a short-sight behavior in politicians.

Computing Business Cycles in Emerging Economy Models

Abstract: We show that computing business cycles in emerging economy models using the discrete state space technique may be misleading. We solve the models of sovereign default presented by Aguiar and Gopinath (2006) using interpolation. We find that the simulated behavior of the spread is quite different from the behavior obtained using discrete state space. In fact, some of the results obtained by Aguiar and Gopinath (2006) using discrete state space are reversed when using interpolation. Our analysis thus provides a new set of benchmark results for quantitative models of sovereign default. ; Updated by Working Paper 09-13

Financially Constrained Stock Returns

Abstract: More financially constrained firms are riskier and earn higher expected returns than less financially constrained firms, although this effect can be subsumed by size and book-to-market Further, because the stochastic discount factor makes capital investment more procyclical, financial constraints are more binding in economic booms These insights arise from two dynamic models In Model 1, firms face dividend nonnegativity constraints without any access to external funds In Model 2, firms can retain earnings, raise debt and equity, but face collateral constraints on debt capacity Despite their diverse structures, the two models share largely similar predictions

Sovereign default risk with heterogenous borrowers

Abstract: We study a standard quantitative model of sovereign default in which the government in a small open economy (SMO) decides how much to save and whether to default on its debt. In contrast with previous quantitative studies, we do not assume that a defaulting country is exogenously excluded from capital markets, and we assume that political parties with different discount factors alternate in power. Preliminary quantitative results indicate that even without assuming exogenous exclusion, after a default episode, the model generates difficulties in market access---in average, for the same level of debt, spreads are higher after default; due to this increase in borrowing costs, capital inflows are initially decreased, and recover slowly after that. We also describe the strategic interaction of governments with different patience

A quantitative study of sovereign default with heterogenous borrowers

Abstract: We study a standard model of sovereign default, but we assume that governments with different discount factors alternate in power. Our model generates the default probability observed in the data, and consequently it generates higher spreads than the benchmark without heterogeneity. The alternation in power of different government types is crucial to generate a higher default probability. The default probability is higher in an economy where patient and impatient governments alternate in power than in an economy with only impatient (or patient) governments. The model also generates higher volatility in spreads than a model without heterogeneity. Moreover, difficulties in market access after a default episode appear endogenously. The paper also provides insights on how do changes in government stability impact on the default risk, and thus, on spreads. We shall also describe the strategic interaction of governments with different patience. JEL classification: F34, F41. Keywords: Sovereign Default, Political Risk, Strategic Behavior, Endogenous Borrowing Constraints, Markov Perfect Equilibrium.