Multiple Potential Payers and Sovereign Bond Prices
AbstractSovereign bonds are usually priced under the assumption that only the sovereign issuer may be responsible of their repayment. In some cases however, bondholders may legitimately expect to be repaid by more than one agent. For example, when a country breaks-up, successor states may agree to recognize their responsibility for part of the debt. Other extreme events, such as repudiations, may lead (and have led) bondholders to consider several bailout candidates at the same point in time. This paper first discusses the theoretical financial implications stemming from an infrequent and challenging situation, namely the existence of multiple potential payers. Then, through a historical precedent, the 1918 Russian repudiation, the paper confirms that the existence of multiple potential payers has a diversification effect which lowers the volatility of the bond price and increases its value. These results are strengthened by a comparison with a closely related standard case of default.
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 08-011.RS.
Length: 24 p.
Date of creation: 2008
Date of revision:
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Sovereign bonds; Repudiation; Default; Portfolio diversification; Multiple payers; Russia; Romania; Financial history.;
Other versions of this item:
- Kim Oosterlinck & Loredana Ureche-Rangau, 2008. "Multiple Potential Payers and Sovereign Bond Prices," Working Papers 75, Bank of Greece.
- Kim Oosterlinck & Loredana Ureche-Rangau, 2008. "Multiple potential payers and sovereign bond prices," ULB Institutional Repository 2013/14301, ULB -- Universite Libre de Bruxelles.
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
- N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-04-15 (All new papers)
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