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Cambridge Endowment for Research in Finance (CERF)


Elisa Faraglia

Title of research: Optimal Debt Management and Callable Bonds

The recent turbulent years have shifted the research attention to government debt management and optimal government debt structure issues. Most of the optimal debt management theoretical literature so far has abstracted from the empirical evidence that shows that Debt Management Offices rarely buy back their debt and that they prefer to leave the outstanding instruments to mature. However the data show also that during World War II until the beginning of the '80s governments have largely used callable bonds as debt management instruments. Using a theoretical model I will establish the condition under which the government will optimally call back part of the debt. The theoretical results will be compared to the empirical evidence provided by US and Swiss data.

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