Optimal Debt-Maturity Management (with Saki Bigio and Galo Nuño)
Abstract:
We solve the problem of a government that wants to
smooth financial expenses by choosing over a continuum of bonds of differen
t maturity. The planner takes into account that adjusting debt too fast can
affect prices. At the same time, it wants to insure against several source
s of risk: (a) income risk, (b) interest rate (price) risk, (c) liquidity r
isk (prices can become more sensitive to issuance’s), and (d) the risks in
the cost of default. We characterize this infinite dimensional control prob
lem to aid the design of the debt-maturity profile in response to these for
ms of risk.