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Why Do Investors Still Hope? The Soviet Repudiation Puzzle (1918- 1919)

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  • Oosterlinck Kim

    (Universite Libre de Bruxelles)

Abstract

Based on an original database, this paper provides an empirical study of Tsarist bond prices reactions after their repudiation by the Soviets. For the two years following the repudiation two striking features of a representative Tsarist bond traded in Paris are highlighted: first, the price decline following the repudiation announcement was limited; second the price remained relatively high, and even increased. This is the so- called Soviet Repudiation Puzzle. We argue that the bonds’ persistent high relative value can be approached via the Peso problem hypothesis: prices are affected by expected events that never took place and thus remained unobservable. In the Russian case, several unusual events could have been expected: a dramatic change in the Russian attitude, due for instance to the Soviet overthrow or a takeover of part of the debt either by the French or by another government (most likely countries created from the former Russian Empire). In this respect, the Soviet Repudiation Puzzle appears as a multidimensional peso problem.

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Bibliographic Info

Paper provided by EconWPA in its series Economic History with number 0409002.

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Length: 37 pages
Date of creation: 24 Sep 2004
Date of revision:
Handle: RePEc:wpa:wuwpeh:0409002

Note: Type of Document - pdf; pages: 37
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Web page: http://128.118.178.162

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Keywords: Repudiation; sovereign debt; secession; Russia; Soviet; war; country break-up.;

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  1. Eaton, J. & Fernandez, R., 1995. "Sovereign Debt," Papers 37, Boston University - Department of Economics.
  2. William O. Brown, Jr. & Richard C.K. Burdekin, . "German Debt Traded in London During World War II: A British Perspective on Hitler," Claremont Colleges Working Papers 1999-19, Claremont Colleges.
  3. Kim Oosterlinck, 2003. "The Bond Market and the Legitimacy of Vichy France," Working Papers CEB 03-003.RS, ULB -- Universite Libre de Bruxelles.
  4. Peter H. Lindert & Peter J. Morton, 1989. "How Sovereign Debt Has Worked," NBER Chapters, in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages 39-106 National Bureau of Economic Research, Inc.
  5. Waldenström, Daniel & Frey, Bruno S., 2002. "How Government Bond Prices Reflect Wartime Events. The Case of the Stockholm Market," Working Paper Series in Economics and Finance 489, Stockholm School of Economics.
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  9. Wells, John & Wills, Douglas, 2000. "Revolution, Restoration, and Debt Repudiation: The Jacobite Threat to England's Institutions and Economic Growth," The Journal of Economic History, Cambridge University Press, vol. 60(02), pages 418-441, June.
  10. Claessens, Stijn & Pennacchi, George, 1996. "Estimating the Likelihood of Mexican Default from the Market Prices of Brady Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 109-126, March.
  11. Wells, John & Wills, Dougals, 2000. "Revolution, Restoration, and Debt Repudiation: The Jacobite Threat to England's Institutions and Economic Growth," The Journal of Economic History, Cambridge University Press, vol. 60(02), pages 418-441, June.
  12. Frey, Bruno S & Kucher, Marcel, 2001. "Wars and Markets: How Bond Values Reflect the Second World War," Economica, London School of Economics and Political Science, vol. 68(271), pages 317-333, August.
  13. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
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