The Center for Analytical Finance (CAFIN) added a new working paper to the website.
Adding to the center's cutting-edge research is "The Pricing of Sovereign Risk Under Costly Information" by Grace Weishi Gu and Zach Stangebye. This is the 37th paper the center has published.
The abstract reads: “We explore the consequences of costly information acquisition on the pricing of sovereign risk. We consider an environment in which lenders' information acquisition and the sovereign's default decision are jointly endogenous. We find that the model generates state- dependent allocation of investor attention, which has a number of implications: First, it serves as a microfoundation for country-specific time-varying volatility in the spread; second, it implies that model-based estimates of default risk from spread data will be negatively biased during crisis periods; and third, it suggests that some fiscal opacity, as opposed to full transparency, can improve sovereign welfare. We also contribute to the literature by developing an approach to identify the cost of information acquisition for structural model calibrations.”The working paper can be downloaded here.