Why Do Investors Still Hope? The Soviet Repudiation Puzzle (1918- 1919)
Based on an original database, this paper provides an empirical study of Tsarist bond prices reactions after their repudiation by the Soviets. For the two years following the repudiation two striking features of a representative Tsarist bond traded in Paris are highlighted: first, the price decline following the repudiation announcement was limited; second the price remained relatively high, and even increased. This is the so- called Soviet Repudiation Puzzle. We argue that the bonds’ persistent high relative value can be approached via the Peso problem hypothesis: prices are affected by expected events that never took place and thus remained unobservable. In the Russian case, several unusual events could have been expected: a dramatic change in the Russian attitude, due for instance to the Soviet overthrow or a takeover of part of the debt either by the French or by another government (most likely countries created from the former Russian Empire). In this respect, the Soviet Repudiation Puzzle appears as a multidimensional peso problem.
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