PhD Research Proposal Presentation: Borel Espoir Senan Ahonon
Essays on Macrofinance and Sovereign Credit Risk
Tuesday, July 29, 2025, at 10:00 am
Borel Espoir Senan Ahonon, a doctoral student at McGill University in the area of Finance will be presenting his research proposal entitled:
(The presentation will be conducted on Zoom)
Student Committee Co-chairs: Professor Patrick Augustin and Professor Guillaume Roussellet
ABSTRACT
This proposal explores how investors interpret macroeconomic signals and how these interpretations affect asset prices such as Treasury yields, sovereign credit spreads, and exchange rates. In the first and co-authored paper, we shed light on the effect of learning about long-run macroeconomic risks and its effect on the term structure of Treasury yields. We develop a macro-finance model where inflation, growth, and the monetary policy rate are driven by a combination of long-run trends and shorter-lived cycles. The representative investor only observes the aggregate macroeconomic variables but not their decomposition in permanent and transitory components, so she performs Bayesian learning. Despite the learning complexity, our model produces closed-form affine Treasury yields formulas. Estimation reveals significant uncertainty about long-term real interest rate estimates, in sharp contrast with those obtained from perfect information models. We find that because the investor confuses trends with cycles when faced with aggregate macroeconomic movements, the yield curve can under or overreact to structural shocks.
In the second paper, I explore the relationship between sovereign credit risk and exchange rate and how the difference in credit default swaps (CDS) spreads on the same entity but denominated in different currencies, i.e. quanto spread, arises. I empirically document a negative contemporaneous relationship between sovereign credit risk and exchange rate and a positive predictability of exchange rates by quanto CDS spreads. I then propose an international macro-finance model in which the level, volatility, and term structure of the quanto spread are driven by a rare disaster risk with time-varying probability and its contagion effect. These features of quanto spread depend on the correlation of cross-country expected consumption volatilities and present a trade-off: an upward term structure of quanto spread and a strong negative contemporaneous relationship lead to a negative predictability relationship and exceedingly high exchange rate volatility.
The third paper documents that both a country’s domestic inflation rate and the U.S. inflation rate significantly influence financial market perceptions of sovereign credit risk across the world. My findings indicate that high domestic inflation is positively correlated with an increased probability of government default, whereas high U.S. inflation is associated with a decrease in the global component of sovereign credit risk. These effects are consistent across both panel and country-level analyses and are not driven by the global inflation factor. Furthermore, domestic inflation directly affects the level of sovereign credit risk, while U.S. inflation flattens its term structure. Importantly, the influence of U.S. inflation remains unaffected by factors such as foreign exchange rates, U.S. inflation expectations, or U.S. real business conditions.