We develop a sovereign default model with debt renegotiation in which interest-rate shocks affect default incentives … cost increases and lenders accept larger haircuts, which makes default more attractive ex-ante. We use the model to study … the 1982 Mexican default, which followed a large increase in US interest rates. Our novel renegotiation mechanism is key …

This paper addresses the relationship between stock markets and credit default swaps (CDS) markets. In particular, I …