Patrick Augustin

Desautels Faculty of Management
McGill University
1001 Sherbrooke Street West, Room 552
Montreal, Qc H3A 1G5 Canada

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: McGill University

NBER Working Papers and Publications

November 2019Benchmark Interest Rates When the Government is Risky
with Mikhail Chernov, Lukas Schmid, Dongho Song: w26429
Since the Global Financial Crisis, rates on interest rate swaps have fallen below maturity matched U.S. Treasury rates across different maturities. Swap rates represent future uncollateralized borrowing between banks. Treasuries should be expensive and produce yields that are lower than those of maturity matched swap rates, as they are deemed to have superior liquidity and to be safe, so this is a surprising development. We show, by no-arbitrage, that the U.S. sovereign default risk explains the negative swap spreads over Treasuries. This view is supported by a quantitative equilibrium model that jointly accounts for macroeconomic fundamentals and the term structures of interest and U.S. credit default swap rates. We account for interbank credit risk, liquidity effects, and cost of collate...
April 2018Sovereign Credit Risk and Exchange Rates: Evidence from CDS Quanto Spreads
with Mikhail Chernov, Dongho Song: w24506
Sovereign CDS quanto spreads—the difference between CDS premiums denominated in U.S. dollars and a foreign currency—tell us how financial markets view the interaction between a country's likelihood of default and associated currency devaluations (the Twin Ds). A noarbitrage model applied to the term structure of quanto spreads can isolate the interaction between the Twin Ds and gauge the associated risk premiums. We study countries in the Eurozone because their quanto spreads pertain to the same exchange rate and monetary policy, allowing us to link cross-sectional variation in their term structures to cross-country differences in fiscal policies. The ratio of the risk-adjusted to the true default intensities is 2, on average. Conditional on the occurrence of default, the true and risk-adj...

Published: Patrick Augustin & Mikhail Chernov & Dongho Song, 2019. "Sovereign credit risk and exchange rates: Evidence from CDS quanto spreads," Journal of Financial Economics, .

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