The Costs of Sovereign Default: Evidence from the Stock Market

72 Pages Posted: 11 Nov 2010 Last revised: 17 Aug 2017

See all articles by Sandro C. Andrade

Sandro C. Andrade

University of Miami - Department of Finance

Vidhi Chhaochharia

University of Miami - Department of Finance

Date Written: July 2017

Abstract

We use stock market data to test cross-sectional implications of theories of sovereign default and provide a market-based estimate of sovereign default costs. We find that the stock prices of firms vulnerable to financial intermediation disruption, or firms more exposed to the government, are particularly sensitive to changes in sovereign credit spreads. This is consistent with theories in which default is costly because it disrupts financial intermediation and damages government reputation. Estimation of a structural valuation model indicates that the market prices stocks as if sovereign default has large effects on vulnerable stocks, translating to a 12% destruction of the value of their productive assets.

Keywords: sovereign default, sovereign risk, financial intermediation, government reputation, Euro crisis

JEL Classification: F34, G12, G15

Suggested Citation

Andrade, Sandro C. and Chhaochharia, Vidhi, The Costs of Sovereign Default: Evidence from the Stock Market (July 2017). Available at SSRN: https://ssrn.com/abstract=1706383 or http://dx.doi.org/10.2139/ssrn.1706383

Sandro C. Andrade (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://moya.bus.miami.edu/~sandrade/

Vidhi Chhaochharia

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

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