Mispricing of Risk in Sovereign Bond Markets with Asymmetric Information

2016 ◽  
Vol 17 (4) ◽  
pp. 491-511 ◽  
Author(s):  
Benedikt Mihm
Keyword(s):  
Asymmetric Information ◽  
Default Risk ◽  
Sovereign Debt ◽  
Debt Crisis ◽  
Fiscal Sustainability ◽  
Bond Prices ◽  
Sovereign Bond ◽  
European Sovereign Debt Crisis ◽  
The Government ◽  
Sovereign Bond Markets

Abstract The likelihood that a government will repay its sovereign debt depends both on the amount of debt it issues and on the government’s future ability to repay. Whilst the former is publicly observable, the government may have more information about the latter than investors. This paper shows that this asymmetric information problem impairs the market’s ability to differentiate economies according to their fiscal sustainability, and can lead to a disconnect between bond prices and default risk. The model can help rationalise the behaviour of Eurozone bond prices prior to the recent European sovereign debt crisis.

scholarly journals The Impact of the Introduction of Uniform European Collective Action Clauses on European Government Bonds as a Regulatory Result of the European Sovereign Debt Crisis

2020 ◽  
Vol 14 (1) ◽  
pp. 1
Author(s):  
Nicoletta Layher ◽  
Eyden Samunderu
Keyword(s):  
European Union ◽  
Sovereign Debt ◽  
Debt Crisis ◽  
Sovereign Debt Crisis ◽  
The European Union ◽  
Bond Yields ◽  
Member States ◽  
Sovereign Bond ◽  
European Sovereign Debt Crisis ◽  
Collective Action Clauses

This paper conducts an empirical study on the inclusion of uniform European Collective Action Clauses (CACs) in sovereign bond contracts issued from member states of the European Union, introduced as a regulatory result of the European sovereign debt crisis. The study focuses on the reaction of sovereign bond yields from European Union member states with the inclusion of the new regulation in the European Union. A two-stage least squares regression analysis is adopted in order to determine the extent of impact effects of CACs on member states sovereign bond yields. Evidence is found that CACs in the European Union are priced on financial markets and that sovereign bond yields do respond to the inclusion of uniform CACs in the European Union.

scholarly journals The Invisible Hand of the Government: Moral Suasion during the European Sovereign Debt Crisis

2019 ◽  
Vol 11 (4) ◽  
pp. 346-379 ◽  
Author(s):  
Steven Ongena ◽  
Alexander Popov ◽  
Neeltje Van Horen
Keyword(s):  
Sovereign Debt ◽  
Debt Crisis ◽  
Regulatory Compliance ◽  
Government Support ◽  
Invisible Hand ◽  
Sovereign Debt Crisis ◽  
European Sovereign Debt Crisis ◽  
Moral Suasion ◽  
The Government ◽  
Domestic Banks

Using proprietary data on banks’ monthly securities holdings, we show that during the European sovereign debt crisis, domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of domestic sovereign bonds during months when the government needed to roll over a relatively large amount of maturing debt. This result cannot be explained by risk shifting, carry trading, or regulatory compliance. Domestic banks that received government support, are small, or with weaker balance sheets were particularly susceptible to “moral suasion,” while governance of banks played less of a role. (JEL D72, E62, G21, G28, H11, H63).

scholarly journals How did order-flow impact bond prices during the European Sovereign Debt Crisis?

2020 ◽  
Vol 67 ◽  
pp. 13-24
Author(s):  
Zhongguo Lin ◽  
Philip A. Hamill ◽  
Youwei Li ◽  
Zhuowei Sun ◽  
James Waterworth
Keyword(s):  
Sovereign Debt ◽  
Debt Crisis ◽  
Order Flow ◽  
Sovereign Debt Crisis ◽  
Bond Prices ◽  
European Sovereign Debt Crisis

scholarly journals When Governments Promise to Prioritize Public Debt: Do Markets Care?

2020 ◽  
Vol 6 (1) ◽  
pp. 41-74
Author(s):  
Mitu Gulati ◽  
Ugo Panizza ◽  
W Mark C Weidemaier ◽  
Gracie Willingham
Keyword(s):  
Public Debt ◽  
Sovereign Debt ◽  
Debt Crisis ◽  
Sovereign Debt Crisis ◽  
Bond Yields ◽  
Borrowing Costs ◽  
Absolute Priority ◽  
Sovereign Bond ◽  
European Sovereign Debt Crisis ◽  
The Us

Abstract During the European sovereign debt crisis of 2011–13, some nations faced with rising borrowing costs adopted commitments to treat bondholders as priority claimants. That is, if there were a shortage of funds, bondholders would be paid first. In this article, we analyse the prevalence and variety of these types of commitments and ask whether they impact borrowing costs. We examine a reform that was widely touted at the height of the Euro sovereign debt crisis in 2011, in which Spain enshrined in its constitution a strong commitment to give absolute priority to public debt claimants. We find no evidence that this reform had any impact on Spanish sovereign bond yields. By contrast, our examination of the US Commonwealth of Puerto Rico suggests that constitutional priority promises can have an impact, at least where the borrower government is subject to supervening law and legal institutions.

scholarly journals How Did Order-Flow Impact Bond Prices During the European Sovereign Debt Crisis?

2019 ◽  
Author(s):  
Zhongguo Lin ◽  
Youwei Li ◽  
Philip Anthony Hamill ◽  
Zhuowei Sun ◽  
James Waterworth
Keyword(s):  
Sovereign Debt ◽  
Debt Crisis ◽  
Order Flow ◽  
Sovereign Debt Crisis ◽  
Bond Prices ◽  
European Sovereign Debt Crisis

Fiscal Sustainability, Default Risk and Euro Area Sovereign Bond Spreads

2011 ◽  
Author(s):  
Vladimir Borgy ◽  
Thomas Laubach ◽  
Jean-Stéphane Mésonnier ◽  
Jean-Paul Renne
Keyword(s):  
Euro Area ◽  
Default Risk ◽  
Fiscal Sustainability ◽  
Sovereign Bond ◽  
Bond Spreads

scholarly journals Asymmetric correlation of sovereign bond yield dynamics in the Eurozone

2013 ◽  
Vol 60 (6) ◽  
pp. 775-789 ◽  
Author(s):  
Silvo Dajcman
Keyword(s):  
New York ◽  
Debt Crisis ◽  
Bond Markets ◽  
Lower Tail ◽  
Sovereign Bond ◽  
Bond Yield ◽  
Time Periods ◽  
The Difference ◽  
Asymmetric Correlation ◽  
Sovereign Bond Markets

This paper examines the symmetry of correlation of sovereign bond yield dynamics between eight Eurozone countries (Austria, Belgium, France, Germany, Ireland, Italy, Portugal, and Spain) in the period from January 3, 2000 to August 31, 2011. Asymmetry of correlation is investigated pair-wise by applying the test of Yongmiao Hong, Jun Tu, and Guofu Zhou (2007). Whereas the test of Hong, Tu, and Zhou (2007) is static, the present paper provides also a dynamic version of the test and identifies time periods when the correlation of Eurozone sovereign bond yield dynamics became asymmetric. We identified seven pairs of sovereign bond markets for which the null hypothesis of symmetry in correlation of sovereign bond yield dynamics can be rejected. Calculating rolling-window exceedance correlation, we found that the time-varying upper- (i.e. for positive yield changes) and lower-tail correlations (i.e. for negative yield changes) for pair-wise observed sovereign bond markets normally follow each other closely, yet during some time periods (for most pair-wise observed countries, these periods are around the September 11 attack on the New York City WTC and around the start of the Greek debt crisis) the difference in correlation does increase. The results show that the upper- and lower-tail correlation was symmetric before the Eurozone debt crisis for most of the pair-wise observed sovereign bond markets but has become much less symmetric since then.

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