Advanced Search
MyIDEAS: Login

Who Saw Sovereign Debt Crises Coming?

Contents:

Author Info

  • Sebastián Nieto-Parra

    ()

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.brookings.edu/press/Journals/2010/economiafall2009.aspx
Download Restriction: no

Bibliographic Info

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

Volume (Year): (2009)
Issue (Month): ()
Pages:

as in new window
Handle: RePEc:col:000425:008583

Contact details of provider:

Related research

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

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Gaston Gelos & Guido Sandleris & Ratna Sahay, 2004. "Sovereign Borrowing by Developing Countries," IMF Working Papers 04/221, International Monetary Fund.
  2. Carter, Richard B & Manaster, Steven, 1990. " Initial Public Offerings and Underwriter Reputation," Journal of Finance, American Finance Association, vol. 45(4), pages 1045-67, September.
  3. Miles Livingston & Robert E. Miller, 2000. "Investment Bank Reputation and the Underwriting of Nonconvertible Debt," Financial Management, Financial Management Association, vol. 29(2), Summer.
  4. Marco Fioramanti, 2006. "Predicting Sovereign Debt Crises Using Artificial Neural Networks: A Comparative Approach," ISAE Working Papers 72, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
  5. Reinhart, Carmen & Kaminsky, Graciela, 1998. "On crises, contagion, and confusion," MPRA Paper 13709, University Library of Munich, Germany.
  6. Paolo Manasse & Nouriel Roubini, 2005. "'Rules of Thumb' for Sovereign Debt Crises," International Finance 0509003, EconWPA.
  7. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  8. Higgins, W. W. & Moore, B. J., 1980. "Market Structure versus Information Costs as Determinants of Underwriters' Spreads on Municipal Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(01), pages 85-97, March.
  9. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2003. "Government Finance in the Wake of Currency Crises," NBER Working Papers 9786, National Bureau of Economic Research, Inc.
  10. Ana Fostel & Graciela Laura Kaminsky, 2007. "Latin America's Access to International Capital Markets: Good Behavior or Global Liquidity?," NBER Working Papers 13194, National Bureau of Economic Research, Inc.
  11. Daniel J. Bradley & Bradford D. Jordan & Jay R. Ritter, 2003. "The Quiet Period Goes out with a Bang," Journal of Finance, American Finance Association, vol. 58(1), pages 1-36, 02.
  12. Hsuan-Chi Chen & Jay R. Ritter, 2000. "The Seven Percent Solution," Journal of Finance, American Finance Association, vol. 55(3), pages 1105-1131, 06.
  13. Axel Schimmelpfennig & Nouriel Roubini & Paolo Manasse, 2003. "Predicting Sovereign Debt Crises," IMF Working Papers 03/221, International Monetary Fund.
  14. Sebastian Edwards, 1983. "LDC's Foreign Borrowing and Default Risk: An Empirical Investigation," NBER Working Papers 1172, National Bureau of Economic Research, Inc.
  15. Lee, Inmoo & et al, 1996. "The Costs of Raising Capital," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 19(1), pages 59-74, Spring.
  16. Jochen R. Andritzky, 2004. "Implied Default Probabilities and Default Recovery Ratios: An Analysis of Argentine Eurobonds 2000-2002," Econometric Society 2004 Far Eastern Meetings 500, Econometric Society.
  17. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
  18. Edwards, Sebastian, 1984. "LDC Foreign Borrowing and Default Risk: An Empirical Investigation, 1976-80," American Economic Review, American Economic Association, vol. 74(4), pages 726-34, September.
  19. Altinkilic, Oya & Hansen, Robert S, 2000. "Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 191-218.
  20. Ciarlone, Alessio & Trebeschi, Giorgio, 2005. "Designing an early warning system for debt crises," Emerging Markets Review, Elsevier, vol. 6(4), pages 376-395, December.
  21. West, Richard R., 1967. "Determinants of Underwriters' Spreads on Tax Exempt Bond Issues," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 2(03), pages 241-263, September.
  22. Andrea Pescatori & Amadou N R Sy, 2007. "Are Debt Crises Adequately Defined?," IMF Staff Papers, Palgrave Macmillan, vol. 54(2), pages 306-337, June.
  23. David A. Grigorian, 2003. "On the Determinants of First-Time Sovereign Bond Issues," IMF Working Papers 03/184, International Monetary Fund.
  24. Eli M Remolona & Michela Scatigna & Eliza Wu, 2007. "Interpreting sovereign spreads," BIS Quarterly Review, Bank for International Settlements, March.
  25. Lily Hua Fang, 2005. "Investment Bank Reputation and the Price and Quality of Underwriting Services," Journal of Finance, American Finance Association, vol. 60(6), pages 2729-2761, December.
  26. Kaminsky, Graciela L., 2006. "Currency crises: Are they all the same?," Journal of International Money and Finance, Elsevier, vol. 25(3), pages 503-527, April.
  27. Lin, Hsiou-wei & McNichols, Maureen F., 1998. "Underwriting relationships, analysts' earnings forecasts and investment recommendations," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 101-127, February.
  28. Jorge Braga de Macedo & Helmut Reisen, 2003. "Float in Order to Fix?: Lessons from Emerging Markets for EU Accession Countries," OECD Development Centre Working Papers 218, OECD Publishing.
  29. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  30. Sebastián Nieto Parra & Javier Santiso, 2007. "The Usual Suspects: A Primer on Investment Banks' Recommendations and Emerging Markets," OECD Development Centre Working Papers 258, OECD Publishing.
  31. Ljungqvist, Alexander P & Marston, Felicia & Wilhelm Jr, William J, 2003. "Competing for Securities Underwriting Mandates: Banking Relationships and Analyst Recommendations," CEPR Discussion Papers 4162, C.E.P.R. Discussion Papers.
  32. Michaely, Roni & Womack, Kent L, 1999. "Conflict of Interest and the Credibility of Underwriter Analyst Recommendations," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 653-86.
  33. Bernhard Herz & Hui Tong, 2008. "Debt and Currency Crises-Complements or Substitutes?," Review of International Economics, Wiley Blackwell, vol. 16(5), pages 955-970, November.
  34. James, Christopher, 1992. " Relationship-Specific Assets and the Pricing of Underwriter Services," Journal of Finance, American Finance Association, vol. 47(5), pages 1865-85, December.
  35. Arie Melnik & Doron Nissim, 2003. "Debt issue costs and issue characteristics in the Eurobond market," ICER Working Papers 09-2003, ICER - International Centre for Economic Research.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Marc Flandreau & Juan H. Flores & Norbert Gaillard & Sebastián Nieto-Parra, 2009. "The End of Gatekeeping: Underwriters and the Quality of Sovereign Bond Markets, 1815–2007," Working Papers CEB 10-017.RS, ULB -- Universite Libre de Bruxelles.
  2. R. Anton Braun & Tomoyuki Nakajima, 2011. "Making the Case for a Low Intertemporal Elasticity of Substitution," KIER Working Papers 788, Kyoto University, Institute of Economic Research.
  3. R. Anton Braun & Tomoyuki Nakajima, 2011. "Why Prices Don't Respond Sooner to a Prospective Sovereign Debt Crisis," KIER Working Papers 796, Kyoto University, Institute of Economic Research.
  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 15-2011, Economics Section, The Graduate Institute of International Studies, revised 05 Dec 2011.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:col:000425:008583. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roberto Bernal).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.