Tommaso Colozza, “Supply of public debt and demand for risk premia: a Minskian approach to credit risk”

Wednesday April 1  2015
Scuola Normale Superiore
Aula Mancini

Tommaso Colozza
Dipartimento di Statistica e Matematica Applicata all’Economia – Università di Pisa

Financial stability of EMU countries is managed by policy makers through several key macroeconomic indicators; the market instead monitors creditworthiness with credit risk premia embedded in sovereign yields. A demand-supply approach solves this duality: in a Minskian framework, positive inelastic shifts in debt-to-GDP ratio due to widespread macro-financial distress may lower risk appetites of lenders and increase risk premia, up to default. Time-variating risk appetites justify statistical relevance of debt-to-gdp variation on yields levels; if conveniently decomposed, debt velocity allows also to imply a default probability measure comparable to standard CDS-implied measures.