Observing Bailout Expectations During a Total Eclipse of the Sun

Posted: 30 Nov 2009 Last revised: 14 Mar 2011

See all articles by Oscar Bernal

Oscar Bernal

University of Namur

Kim Oosterlinck

Université Libre de Bruxelles - SBS-EM, CEB

Ariane Szafarz

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi

Date Written: November 2010

Abstract

The literature has not reached a consensus yet regarding the existence of sovereign creditor moral hazard. Exploiting an exceptional historical example, this paper proposes an original method to address this issue. As the corona which are observable only during a total eclipse of the sun, market-specific prices of repudiated bonds are observable only when extreme conditions (a war, in this instance) segment the markets. Such events are very rare but insightful as they allow for isolating pure country-specific bailout expectations. The paper shows that bailouts do create creditor moral hazard. Based on an impulse response analysis, the econometric results further emphasize the influence of bailout expectations in sovereign bonds valuation.

Keywords: F33, F34, G1, N24

JEL Classification: bailout, bonds, moral hazard, repudiation, sovereign debt, Soviet, Russia

Suggested Citation

Bernal, Oscar and Oosterlinck, Kim and Szafarz, Ariane, Observing Bailout Expectations During a Total Eclipse of the Sun (November 2010). Journal of International Money and Finance, Vol. 29, No. 7, 2010. Available at SSRN: https://ssrn.com/abstract=1285714

Oscar Bernal

University of Namur ( email )

8 rempart de la vierge
Namur, 5000
Belgium

Kim Oosterlinck

Université Libre de Bruxelles - SBS-EM, CEB ( email )

50 Avenue Roosevelt, CP114/03
Brussels 1050
Belgium

Ariane Szafarz (Contact Author)

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi ( email )

50 Avenue Roosevelt
Brussels 1050
Belgium

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