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Juan Carlos Hatchondo

Bio: Juan Carlos Hatchondo is an academic researcher from Indiana University. The author has contributed to research in topics: Sovereign default & Debt. The author has an hindex of 21, co-authored 79 publications receiving 1552 citations. Previous affiliations of Juan Carlos Hatchondo include University of Western Ontario & Federal Reserve System.
Topics: Sovereign default, Debt, Default, Bond, Credit risk


Papers
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Journal ArticleDOI
TL;DR: In this paper, the authors extended the baseline framework used in recent quantitative studies of sovereign default by assuming that the government can borrow using long-duration bonds and showed that, when 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.

357 citations

Journal ArticleDOI
TL;DR: In this article, the authors extend the model used in recent quantitative studies of sovereign default, allowing policymakers of different types to stochastically alternate in power, and 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.
Abstract: 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.

132 citations

Journal ArticleDOI
TL;DR: In this article, the authors study the optimal accumulation of international reserves in a quantitative model of sovereign default with long-term debt and a risk-free asset and show that income windfalls, improved policy frameworks, and an increase in the importance of rollover risk imply increases in the optimal holdings of reserves that are consistent with the upward trend in reserves in emerging economies.
Abstract: We study the optimal accumulation of international reserves in a quantitative model of sovereign default with long-term debt and a risk-free asset. Keeping higher levels of reserves provides a hedge against rollover risk, but this is costly because using reserves to pay down debt allows the government to reduce sovereign spreads. Our model, parameterized to mimic salient features of a typical emerging economy, can account for significant holdings of international reserves, and the larger accumulation of both debt and reserves in periods of low spreads and high income. We also show that income windfalls, improved policy frameworks, and an increase in the importance of rollover risk imply increases in the optimal holdings of reserves that are consistent with the upward trend in reserves in emerging economies. It is essential for our results that debt maturity exceeds one period.

111 citations

Journal ArticleDOI
TL;DR: In this article, the authors provide a theoretical framework to quantitatively investigate the optimal accumulation of international reserves to hedge against rollover risk, and study a dynamic model of endogenous default in which the government faces a tradeoff between the insurance benefits of reserves with the cost of keeping larger gross debt positions.
Abstract: This paper provides a theoretical framework to quantitatively investigate the optimal accumulation of international reserves to hedge against rollover risk. We study a dynamic model of endogenous default in which the government faces a tradeoff between the insurance benefits of reserves with the cost of keeping larger gross debt positions. A calibrated version of our model is able to rationalize large holdings of international reserves, as well as the procyclicality of reserves and gross debt positions. Model simulations are also consistent with spread dynamics and other key macroeconomic variables in emerging economies. The benefits of insurance arrangements and the effects of restricting the use of reserves after default are also analyzed.

108 citations

Journal ArticleDOI
TL;DR: In this paper, the authors study the sovereign default model that has been used to account for the cyclical behavior of interest rates in emerging market economies and show that this method necessitates a large number of grid points to avoid generating spurious interestrate movements.
Abstract: We study the sovereign default model that has been used to account for the cyclical behavior of interest rates in emerging market economies. This model is often solved using the discrete state space technique with evenly spaced grid points. We show that this method necessitates a large number of grid points to avoid generating spurious interestrate movements. This makes the discrete state technique significantly more inefficient than using Chebyshev polynomials or cubic spline interpolation to approximate the value functions. We show that the inefficiency of the discrete state space technique is more severe for parameterizations that feature a high sensitivity of the bond price to the borrowing level for the borrowing levels that are observed more frequently in the simulations. In addition, we find that the efficiency of the discrete state space technique can be greatly improved by (i) finding the equilibrium as the limit of the equilibrium of the finite-horizon version of the model, instead of iterating separately on the value and bond price functions and (ii) concentrating grid points in asset levels at which the bond price is more sensitive to the borrowing level and in levels that are observed more often in the model simulations. Our analysis is also relevant for the study of other credit markets.

105 citations


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Posted Content
TL;DR: This paper developed a small open economy model to study default risk and its interaction with output, consumption, and foreign debt, which predicts that default incentives and interest rates are higher in recessions, as observed in the data.
Abstract: Recent sovereign defaults in emerging countries are accompanied by interest rate spikes and deep recessions. This paper develops a small open economy model to study default risk and its interaction with output, consumption, and foreign debt. Default probabilities and interest rates depend on incentives for repayment. Default occurs in equilibrium because asset markets are incomplete. The model predicts that default incentives and interest rates are higher in recessions, as observed in the data. The reason is that in a recession, a risk averse borrower finds it more costly to repay non-contingent debt and is more likely to default. In a quantitative exercise the model matches various features of the business cycle in Argentina such as: high volatility of interest rates, higher volatility of consumption relative to output, a negative correlation of interest rates and output and a negative correlation of the trade balance and output. The model can also predict the recent default episode in Argentina.

938 citations

Journal ArticleDOI
TL;DR: This article developed a small open economy model to study default risk and its interaction with output, consumption, and foreign debt, which predicts that default incentives and interest rates are higher in recessions, as observed in the data.
Abstract: Recent sovereign defaults in emerging countries are accompanied by interest rate spikes and deep recessions. This paper develops a small open economy model to study default risk and its interaction with output, consumption, and foreign debt. Default probabilities and interest rates depend on incentives for repayment. Default occurs in equilibrium because asset markets are incomplete. The model predicts that default incentives and interest rates are higher in recessions, as observed in the data. The reason is that in a recession, a risk averse borrower finds it more costly to repay non-contingent debt and is more likely to default. In a quantitative exercise the model matches various features of the business cycle in Argentina such as: high volatility of interest rates, higher volatility of consumption relative to output, a negative correlation of interest rates and output and a negative correlation of the trade balance and output. The model can also predict the recent default episode in Argentina.

783 citations

01 Jan 1892
TL;DR: In this paper, the authors explore a hypothesis, based on acIcumulating evidence, regarding the character of inventions likely to issue from the research laboratories of the large industrial corporations.
Abstract: r 9HE purpose of this paper is to explore a hypothesis, based on acIcumulating evidence, regarding the character of inventions likely to issue from the research laboratories of the large industrial corporations. Simply put, this hypothesis may be stated as follows: with few exceptions, the large industrial laboratories are likely to be minor sources of major (radically new and commercially or militarily important) inventions; rather they are likely to be major sources of essentially "improvement" inventions. Put more precisely, the hypothesis states that the proportion of all minor inventions originating in the large industrial laboratories is likely to exceed the proportion of all major inventions originating in these laboratories. Note that the stress on the relative importance of these laboratories as sources of improvement inventions is not necessarily a denigration of the economic importance of this contribution. The cumulative effect of these improvement inventions may be, and often has been, of substantial importance over long periods of time for advancing technology, investment opportunities, and economic growth. The stress on improvement inventions as the principal product of the research laboratories of the large industrial corporations is meant simply to emphasize that, whatever the importance of their contributions, most of the latter is not likely to involve radically new inventive activity. I cannot claim originality for this hypothesis. After it suggested itself in the course of my investigations, I discovered that others, some of them in the most unlikely positions,2 had earlier said much the same thing. But, apart from occasional remarks, I can find no discussions attempting to explain or justify it. And because, if reasonably accurate, it has numerous ramifications, I have felt the need to set down an extended analysis of 1 I wish to thank members of the Seminar on Law and Technology, sponsored by the University of Wisconsin Law School under the auspices of the Ford Foundation, for their many helpful comments on this paper. Especially do I wish to thank Professors Jacob Schmookler, Robert Merrill, John Stedman, Harrison White, and John Heath. 2 See particularly the statement quoted below (p. 114) of D)r. Frank Jewett, former president of Bell Laboratories.

689 citations

Posted Content
TL;DR: In this article, the authors model investors, endowed with a small home information advantage, who choose what information to learn before they invest, and find that even when home investors can learn what foreigners know, they choose not to: Investors profit more from knowing information others do not know.
Abstract: Many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can. But why does global information access not eliminate this asymmetry? We model investors, endowed with a small home information advantage, who choose what information to learn before they invest. Surprisingly, even when home investors can learn what foreigners know, they choose not to: Investors profit more from knowing information others do not know. Learning amplifies information asymmetry. The model matches patterns of local and industry bias, foreign investments, portfolio outperformance, and asset prices. Finally, we propose new avenues for empirical research. (This abstract was borrowed from another version of this item.)

655 citations