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Observing bailout expectations during a total eclipse of the sun

  • Oscar Bernal Diaz
  • Kim Oosterlinck
  • Ariane Szafarz

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 are observable only during a total eclipse of the sun, market-specific prices of repudiated bonds are observable only when extreme conditions (a war, in this instance) segment the markets. Such events are very rare but insightful as they 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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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 08-015.RS.

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Length: 26 p.
Date of creation: 2008
Date of revision:
Publication status: Published by: Université Libre de Bruxelles, Solvay Business School, Centre Emile Bernheim (CEB)
Handle: RePEc:sol:wpaper:08-015
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