Observing Bailout Expectations During a Total Eclipse of the Sun
Posted: 30 Nov 2009 Last revised: 14 Mar 2011
Date Written: November 2010
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
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