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Pricing GDP-linked bonds
GDP-linked bonds are sovereign debt instruments with repayments linked to the evolution of a country’s GDP. Originally proposed by Shiller in the 90s, they have recently been re-invoked in the debate around the policy response to the Covid-19 pandemic. These instruments present an obvious attraction for issuers: repayments are lower at times when the economy is growing relatively slowly, which typically coincides with lower tax earnings. A greater share of the risk of weak growth is then transferred to investors, who will require a compensation given they are typically risk-averse. Therefore, while the design is ... (full story)