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Observing bailout expectations during a total eclipse of the sun

  • Bernal, Oscar
  • Oosterlinck, Kim
  • Szafarz, Ariane

The literature has not reached a consensus yet regarding the existence of sovereign creditor moral hazard. Exploiting an exceptional historical example, this paper proposes an original method to address this issue. As the corona which is observable only during a total eclipse of the sun, market-specific prices of repudiated bonds are observable only when extreme conditions segment the markets. Such very rare events allow for isolating pure country-specific bailout expectations. The paper shows that bailouts do create creditor moral hazard. Based on an impulse response analysis, the econometric results further emphasize the influence of bailout expectations in sovereign bonds valuation.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 7 (November)
Pages: 1193-1205

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:7:p:1193-1205
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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