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The Benefits of Reducing Hold-Out Risk: Evidence from the Euro CAC Experiment, 2013-2018

Author

Listed:
  • Picarelli, Mattia
  • Erce, Aitor

Abstract

The introduction of collective action clauses in advanced economies’ sovereign bonds is an understudied phenomenon. An important concern is whether these clauses produce segmentation, pushing apart the price of those bonds issued with and without collective action clauses (CACs). This paper uses the introduction in 2013 of mandatory two-limb CACs in euro area sovereign bonds issued under domestic law to evaluate the price impact of these provisions. In the euro area, bonds with CACs trade at a small premium. On average for those bonds, yields were up to six basis points lower. This average, however, masks heterogeneity. While Germany and Netherlands have not seen a sustained reduction in borrowing costs, in Italy and Spain the effect has been large (between five and ten basis points). These findings support the argument that the introduction of euro CACs in domestic law bonds helped investors reassess the risks associated with those instruments in both countries. impact of these provisions. In the euro area, bonds with CACs trade with a small premium. On average, for those bonds yields were up to six basis points lower. This average, however, masks heterogeneity. While Germany and Netherlands have not seen a sustained reduction in borrowing costs, in Italy and Spain the effect has been large (between five and ten basis points). These findings provide support to the argument that the introduction of euro CACs in domestic law bonds helped investors reassess the risk associated with those instruments in both two countries

Suggested Citation

  • Picarelli, Mattia & Erce, Aitor, 2018. "The Benefits of Reducing Hold-Out Risk: Evidence from the Euro CAC Experiment, 2013-2018," MPRA Paper 89973, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:89973
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    File URL: https://mpra.ub.uni-muenchen.de/90369/1/MPRA_paper_90369.pdf
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    References listed on IDEAS

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    8. Ghosal, Sayantan & Thampanishvong, Kannika, 2013. "Does strengthening Collective Action Clauses (CACs) help?," Journal of International Economics, Elsevier, vol. 89(1), pages 68-78.
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    Cited by:

    1. Mitu Gulati & Ugo Panizza & W. Mark C. Weidemaier & Gracie Willingham, 2019. "When Governments Promise to Prioritize Public Debt: Do Markets Care?," IHEID Working Papers 07-2019, Economics Section, The Graduate Institute of International Studies.

    More about this item

    Keywords

    Collective action clause; hold-outs; sovereign risk; bond yields;

    JEL classification:

    • F3 - International Economics - - International Finance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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