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Pricing Contract Terms in a Crisis: Venezuelan Bonds in 2016

Forthcoming, Capital Markets Law Journal (2016)

22 Pages Posted: 13 Jun 2016 Last revised: 11 Jul 2017

Elena Carletti

Bocconi University - Department of Finance; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Paolo Colla

Bocconi University - Department of Finance; Bocconi University - BAFFI Center on International Markets, Money, and Regulation

G. Mitu Gulati

Duke University School of Law

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Date Written: July 10, 2016

Abstract

As of this writing in June 2016, the markets are predicting Venezuela to be on the brink of default. On June 1, 2016, the 6 month CDS contract traded at about 7000bps which translates into a likelihood of default of over 90%. Our interest in the Venezuelan crisis is that its outstanding sovereign bonds have a unique set of contractual features that, in combination with its near-default status, have created a natural experiment. This experiment has the potential to shed light on one of the long standing questions that sits at the intersection of the fields of law and finance, the question of the degree to which financial markets price contract terms. We find evidence to suggest that at least within the confines of a near-default scenario, the markets are highly sensitive to even small differences in contract language.

Keywords: efficient markets, contracts, bonds, sovereign debt, collective action clauses, pari passu

JEL Classification: F34, H63, H74, H81, K12

Suggested Citation

Carletti, Elena and Colla, Paolo and Gulati, G. Mitu and Ongena, Steven, Pricing Contract Terms in a Crisis: Venezuelan Bonds in 2016 (July 10, 2016). Forthcoming, Capital Markets Law Journal (2016). Available at SSRN: https://ssrn.com/abstract=2794509

Elena Carletti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

Paolo Colla

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )

Milano, 20136
Italy

Gaurang Mitu Gulati (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

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