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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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    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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