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The Costs of Sovereign Default: Evidence from Argentina

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  • Benjamin Hebert
  • Jesse Schreger

Abstract

We estimate the causal effect of sovereign default on the equity returns of Argentine firms. We identify this effect by exploiting changes in the probability of Argentine sovereign default induced by legal rulings in the case of Republic of Argentina v. NML Capital. Using a Rigobon (2003) heteroskedasticity-based identification strategy, we find that a 1% increase in the probability of default causes a 0.55% decline in the value of Argentine equities. We construct tracking portfolios for the present value of output growth, and estimate that the entire default episode caused a reduction in this measure of between 2.4% and 6%.

Suggested Citation

  • Benjamin Hebert & Jesse Schreger, 2014. "The Costs of Sovereign Default: Evidence from Argentina," Working Paper 223706, Harvard University OpenScholar.
    • Handle: RePEc:qsh:wpaper:223706
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    File URL: http://scholar.harvard.edu/schreger/node/223706
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    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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