Default risk and risk averse international investors

► I study the effects of having risk averse investors in a model of endogenous default risk. ► Risk averse investors require a higher risk premium for default than risk neutral investors. ► With risk averse investors larger and more volatile sovereign spreads can be explained. ► Investors' preferences have decreasing absolute aversion: tolerance to risk depends on wealth. ► There is a negative correlation between investors' wealth and interest rate spread.