Sovereign Bond Prices, Haircuts and Maturity

Rejecting a common assumption in the sovereign debt literature, we document that creditor losses ('haircuts') during sovereign restructuring episodes are asymmetric across debt instruments. We code a comprehensive dataset on instrument-specific haircuts for 28 debt restructurings with private creditors in 1999-2015 and find that haircuts on shorter-term debt are larger than those on debt of longer maturity. In a standard asset pricing model, we show that increasing short-run default risk in the run-up to a restructuring episode can explain the stylized fact. The data confirms the predicted relation between perceived default risk, bond prices, and haircuts by maturity.

Keywords: Sovereign Debt; Default; Debt Restructuring; Bond Prices; Haircuts; Maturity; Default Probability, Sovereign Debt, Default, Debt Restructuring, Bond Prices, Haircuts, Maturity, Default Probability, International Lending and Debt Problems, Open Economy Macroeconomics

JEL Classification: F34, F41, H63

Suggested Citation: Suggested Citation

Asonuma, Tamon and Niepelt, Dirk and Ranciere, Romain, Sovereign Bond Prices, Haircuts and Maturity (May 2017). IMF Working Paper No. 17/119, Available at SSRN: https://ssrn.com/abstract=2978680