A Unified Italy? - Sovereign Debt and Investor Scepticism

Abstract

How do investors react to the issuance of common sovereign debt? This question is particularly relevant regarding the European sovereign debt crisis. The paper empirically studies the issuance of common debt during Italy’s unification. Based on an original database of Italian bonds, this paper shows the impact of Italy’s unification on bond prices. Around the sovereign debt integration, the paper highlights a substantial increase in the risk premium for low-yield bonds. Using break-point analysis and a Bayesian Dynamic Factor Model, the paper proves that investors did not believe in Italy’s unification for about six years, until common taxation was introduced.

Keywords: state succession, unification, financial history, sovereign debt, Italy

JEL Classification: F34, G12, G15, N23