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Who Saw Sovereign Debt Crises Coming?

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  • Sebastián Nieto-Parra

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Abstract

This paper studies sovereign debt crises during the period 1993-2006 through the prism of the primary sovereign bond market. It finds that one cannot reject the hypothesis that investment banks price sovereign default risk well before crises emerge and well before investors do. Investment banks charge a much higher underwriting fee between three years and one year before a crisis than they do during tranquil periods. This result is statistically significant after controlling for sovereign bond spreads and other variables. Moreover, investment banks´ behavior differs depending on the type of debt crisis. Before crises, investment banks charged on average a higher underwriting fee to countries presenting bad fundamentals than to other sovereign debt crisis countries. Finally, underwriting fees can be used as early warning indicators of debt crises. These results show that underwriting fees provide valuable information. It is puzzling that investors do not use this potentially useful public information in order to allocate efficiently their portfolios of emerging market fixed-income assets.

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Bibliographic Info

Article provided by LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION in its journal JOURNAL OF LACEA ECONOMIA.

Volume (Year): (2009)
Issue (Month): ()
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Handle: RePEc:col:000425:008583

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Keywords: sovereign debt crises; primary bond market; underwriter spread; information;

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Cited by:
  1. Marc Flandreau & Juan H. Flores & Norbert Gaillard & Sebasti�n Nieto‐Parra, 2010. "The End of Gatekeeping: Underwriters and the Quality of Sovereign Bond Markets, 1815–2007," NBER International Seminar on Macroeconomics, University of Chicago Press, University of Chicago Press, vol. 6(1), pages 53 - 92.
  2. R. Anton Braun & Tomoyuki Nakajima, 2011. "Why Prices Don't Respond Sooner to a Prospective Sovereign Debt Crisis," KIER Working Papers, Kyoto University, Institute of Economic Research 796, Kyoto University, Institute of Economic Research.
  3. R. Anton Braun & Tomoyuki Nakajima, 2012. "Making the case for a low intertemporal elasticity of substitution," Working Paper, Federal Reserve Bank of Atlanta 2012-01, Federal Reserve Bank of Atlanta.
  4. Marc Flandreau, Juan Flores, Norbert Gaillard, Sebasti‡n Nieto-Parra, 2011. "The Changing Role of Global Financial Brands in the Underwriting of Foreign Government Debt (1815-2010)," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 15-2011, Economics Section, The Graduate Institute of International Studies, revised 05 Dec 2011.

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