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The Costs of Sovereign Default: Evidence from Argentina

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  • Jesse Schreger

    (Harvard University)

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. Because the legal rulings affected the probability of Argentina defaulting on its debt, independent of underlying economic conditions, these rulings allow us to study the effect of default on firm performance. Using both standard event study methods and a Rigobon (2003) heteroskedasticity-based identification strategy, we find that an increase in the probability of sovereign default causes a decline in the Argentine equity market. A 1% increase in the risk-neutral probability of default causes a 0.55% fall in an index of Argentine American Depository Receipts (ADRs). Extrapolating from these estimates, we conclude that the recent Argentine sovereign default episode caused a cumulative 33% drop in the ADR index from 2011 to 2014.

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  • Jesse Schreger, 2015. "The Costs of Sovereign Default: Evidence from Argentina," 2015 Meeting Papers 240, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:240
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    References listed on IDEAS

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    1. Arteta, Carlos & Hale, Galina, 2008. "Sovereign debt crises and credit to the private sector," Journal of International Economics, Elsevier, vol. 74(1), pages 53-69, January.
    2. Eduardo Borensztein & Ugo Panizza, 2009. "The Costs of Sovereign Default," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 683-741, November.
    3. Auguste, Sebastian & Dominguez, Kathryn M.E. & Kamil, Herman & Tesar, Linda L., 2006. "Cross-border trading as a mechanism for implicit capital flight: ADRs and the Argentine crisis," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1259-1295, October.
    4. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2013. "Government default, bonds, and bank lending around the world: What do the data say?," Economics Working Papers 1378, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2015.
    5. Luigi Bocola, 2014. "The Pass-Through of Sovereign Risk," 2014 Meeting Papers 1286, Society for Economic Dynamics.
    6. Luigi Bocola, 2016. "The Pass-Through of Sovereign Risk," Journal of Political Economy, University of Chicago Press, vol. 124(4), pages 879-926.
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    Cited by:

    1. Arellano, Cristina & Bai, Yan & Bocola, Luigi, 2017. "Sovereign risk and firm heterogeneity," Staff Report 547, Federal Reserve Bank of Minneapolis.
    2. Anusha Chari & Ryan Leary & Toan Phan, 2017. "The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico," NBER Working Papers 24108, National Bureau of Economic Research, Inc.
    3. Trebesch, Christoph & Zabel, Michael, 2017. "The output costs of hard and soft sovereign default," European Economic Review, Elsevier, vol. 92(C), pages 416-432.
    4. Anil Ari, 2015. "Sovereign Risk and Bank Risk-Taking," Working Papers 202, Oesterreichische Nationalbank (Austrian Central Bank).
    5. Alessandro Dovis & Luigi Bocola, 2016. "Self_fulfilling Debt Crises: A Quantitative Analysis," 2016 Meeting Papers 1218, Society for Economic Dynamics.
    6. Fabrice Tourre, 2017. "A Macro-Finance Approach to Sovereign Debt Spreads and Returns," 2017 Meeting Papers 13, Society for Economic Dynamics.
    7. Cristina Arellano & Yan Bai & Luigi Bocola, 2017. "Sovereign Default Risk and Firm Heterogeneity," NBER Working Papers 23314, National Bureau of Economic Research, Inc.
    8. Julian Schumacher, Christoph Trebesch, Henrik Enderlein, . "What Explains Sovereign Debt Litigation?," Journal of Law and Economics, University of Chicago Press, vol. 58(3).
    9. Danny Cassimon & Dennis Essers & Karel Verbeke, 2017. "Sovereign Debt Workouts: Quo Vadis?," BeFinD Policy Briefs 4, University of Namur, Department of Economics.

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