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Sovereign Bond Prices, Haircuts and Maturity

Tamon Asonuma, Dirk Niepelt, Romain Rancière

NBER Working Paper No. 23864
Issued in September 2017
NBER Program(s):International Finance and Macroeconomics

Rejecting a common assumption in the sovereign debt literature, we document that creditor losses ("haircuts") during sovereign restructuring episodes are asymmetric across debt instruments. We code a comprehensive dataset on instrument-specific haircuts for 28 debt restructurings with private creditors in 1999-2015 and find that haircuts on shorter-term debt are larger than those on debt of longer maturity. In a standard asset pricing model, we show that increasing short-run default risk in the run-up to a restructuring episode can explain the stylized fact. The data confirms the predicted relation between perceived default risk, bond prices, and haircuts by maturity.

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Document Object Identifier (DOI): 10.3386/w23864

Published: Tamon Asonuma & Dirk Niepelt & Romain Ranciere, 2017. "Sovereign Bond Prices, Haircuts and Maturity," IMF Working Papers, vol 17(119).

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