Time-varying volatility, default and the sovereign risk premium Articles uri icon

publication date

  • February 2019

start page

  • 283

end page

  • 301


  • 1


  • 60

International Standard Serial Number (ISSN)

  • 0020-6598

Electronic International Standard Serial Number (EISSN)

  • 1468-2354


  • This article studies how volatility changes affect sovereign spreads in strategic default models. Volatility changes affect savings and sovereign spreads. However, the impact of volatility shocks is state dependent; when the economy has a low debt, an increase in volatility is prone to generate precautionary savings. Instead, with high debt, an increase in volatility is likely to induce an even further increase in debt and spreads, both in endowment and production economies. I document a positive correlation between sovereign spreads and aggregate income volatility for a set of European economies during the debt crisis, consistent with the model's implications.


  • interest-rates; uncertainty; spreads; debt; investment