Sovereign default and the choice of maturity

This study develops a novel model of endogenous sovereign debt maturity that rationalizes various stylized facts about debt maturity and the yield spread curve: first, sovereign debt duration and maturity generally exceed one year, and co-move positively with the business cycle. Second, sovereign yield spread curves are usually non-linear and upward-sloped, and may become non-monotonic and inverted during a period of high credit market stress, such as a default episode. Finally, output volatility, impatience, risk aversion, and especially sudden stops, are key determinants of maturity, both in our model and in the data.Yurdagul gratefully acknowledges the support from the Ministerio Economía y Competitividad (Spain), María de Maeztu grant (MDM 2014-0431), and from Comunidad de Madrid, MadEco-CM (S2015/HUM-3444)