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Is there a Novelty Premiumon New Financial Instruments? the Argentine Experience with Gdp-Indexed Warrants

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Author Info

  • Luca Antonio Ricci
  • Marcos Chamon
  • Alejo Costa

Abstract

This paper examines the Argentine experience with GDP-indexed warrants in order to gauge the existence of a novelty premium on new financial instruments. It develops a Monte Carlo pricing exercise to calculate the expected net present value of payments, on the basis of various forecast assumptions. The results show that the residual premium paid by these warrants over standard bonds declined significantly by about 600 basis points between December 2005 and July 2007. This suggests that financial innovation may be associated with premia, which decay reasonably fast.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/109.

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Length: 40
Date of creation: 01 Apr 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/109

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Related research

Keywords: Financial instruments; Economic models; discount rate; inflation; bonds; bond; cash flows; indexed bonds; discount bond; financial innovation; discount rates; monetary fund; moral hazard; financial markets; discounting; net present value; bond holders; present value; futures market; international financial markets; treasury bond; nominal exchange rate; stock market; indexed bond; stock market indices; international reserves; currency risk; financial assets; central bank; derivative securities; emerging market bonds; deposit freezes; derivative; conventional bonds; nominal interest rate; financial instability; financial fragility; financial market development; monetary policy; bond markets; stock of debt; financial market; denominated bonds; futures contracts; bond yields;

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References

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  1. Eduardo Borensztein & Olivier Jeanne & Paolo Mauro & Jeromin Zettelmeyer & Marcos Chamon, 2005. "Sovereign Debt Structure for Crisis Prevention," IMF Occasional Papers 237, International Monetary Fund.
  2. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
  3. Brorsen, B. Wade & Fofana, N'Zue F., 2001. "Success And Failure Of Agricultural Futures Contracts," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 19(2).
  4. W. Scott Frame & Lawrence White, 2002. "Empirical Studies of Financial Innovation: Lots of Talk, Little Action?," Working Papers 02-18, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Department of Economics, Working Paper Series qt44g3n2j8, Department of Economics, UC Santa Cruz.
  6. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds," Economic Policy, CEPR & CES & MSH, vol. 19(38), pages 165-216, 04.
  7. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries," IMF Working Papers 06/229, International Monetary Fund.
  8. Enrique Schroth, 2006. "Innovation, Differentiation, and the Choice of an Underwriter: Evidence from Equity-Linked Securities," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 1041-1080.
  9. Stephany Griffith-Jones & Krishnan Sharma, 2006. "GDP-Indexed Bonds: Making It Happen," Working Papers 21, United Nations, Department of Economics and Social Affairs.
  10. Paolo Mauro & Marcos Chamon, 2005. "Pricing Growth-Indexed Bonds," IMF Working Papers 05/216, International Monetary Fund.
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Cited by:
  1. Diaw, Abdou & Bacha, Obiyathulla Ismath & Lahsasna, Ahcene, 2011. "Public Sector Funding and Debt Management: A Case for GDP-Linked Sukuk," MPRA Paper 46008, University Library of Munich, Germany, revised 2011.

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