The Benefits of Reducing Hold-Out Risk: Evidence from the Euro CAC Experiment, 2013-2018

33 Pages Posted: 5 Dec 2018

See all articles by Mattia Osvaldo Picarelli

Mattia Osvaldo Picarelli

Sapienza University of Rome

Aitor Erce

European Stability Mechanism; Banco de España - Associate Directorate General International Affairs

Xu Jiang

European Stability Mechanism

Multiple version iconThere are 2 versions of this paper

Date Written: December 5, 2018

Abstract

The introduction of collective action clauses in advanced economies’ sovereign bonds is an understudied phenomenon. An important concern is whether these clauses produce segmentation, pushing apart the price of those bonds issued with and without collective action clauses (CACs). This paper uses the introduction in 2013 of mandatory two-limb CACs in euro area sovereign bonds issued under domestic law to evaluate the price impact of these provisions. In the euro area, bonds with CACs trade at a small premium. On average for those bonds, yields were up to six basis points lower. This average, however, masks heterogeneity. While Germany and Netherlands have not seen a sustained reduction in borrowing costs, in Italy and Spain the effect has been large (between five and ten basis points). These findings support the argument that the introduction of euro CACs in domestic law bonds helped investors reassess the risks associated with those instruments in both countries.

Keywords: Collective action clause, hold-outs, sovereign risk, bond yields

JEL Classification: F34, H63, K41

Suggested Citation

Picarelli, Mattia Osvaldo and Erce, Aitor and Jiang, Xu, The Benefits of Reducing Hold-Out Risk: Evidence from the Euro CAC Experiment, 2013-2018 (December 5, 2018). European Stability Mechanism Working Paper No. 33. Available at SSRN: https://ssrn.com/abstract=3296227 or http://dx.doi.org/10.2139/ssrn.3296227

Mattia Osvaldo Picarelli

Sapienza University of Rome ( email )

Piazzale Aldo Moro, 5
Rome, 00185
Italy

Aitor Erce (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
Luxembourg, 1347
Luxembourg

Banco de España - Associate Directorate General International Affairs

Alcala 50
Madrid 28014
Spain

Xu Jiang

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

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