Sovereign Bond Prices, Haircuts and Maturity
CEPR Discussion Paper 12252
45 Pages Posted: 11 Sep 2017
Date Written: August 29, 2017
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; Sovereign Default; Debt Restructuring; Bond Prices; Haircuts; Maturity; Default Probability
JEL Classification: F34; F41; H63
Suggested Citation: Suggested Citation