The Term-Structure of Sovereign Default Risk in Colombia and its Determinants
The series Working Papers on Economics is published by the Office for Economic Studies at the Banco de la República (Central Bank of Colombia). The works published are provisional, and their authors are fully responsible for the opinions expressed in them, as well as for possible mistakes. The opinions expressed herein are those of the authors and do not necessarily reflect the views of Banco de la República or its Board of Directors.
We study the determinants of sovereign default risk in Colombia by focusing on different time spans of risk which are indicated by yield spreads of government bonds with different maturities. Cointegration regressions are performed to analyze whether the drivers of short-run default risk are different from those of long-run default risk. Our results show that government indebtedness indicators are important determinants of default risk for yield spreads of bonds with maturities shorter than 7 years. In contrast, increases in investment and output growth indicators lower default risk at all maturities. A lower current account balance or a higher exchange rate volatility increase default risk for maturities lower than 10 years. Finally, an openness indicator is found to have positive effects on default risk for maturities longer than 7 years. This last effect is probably due to the increasing external vulnerability that results when a country becomes more integrated to the global economy.
The opinions and findings in this document are those of the authors and do not necessarily represent those of the Banco de la República or its Board of Governors.
