Selective default expectations

Olivier Accominotti, Thilo Albers and Kim Oosterlinck

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper explores how selective default expectations affect the pricing of sovereign bonds in a historical laboratory: the German default of the 1930s. We analyze yield differentials between identical government bonds traded across various creditor countries before and after bond market segmentation. We show that, when secondary debt markets are segmented, a large selective default probability can be priced in bond yield spreads. Selective default risk accounted for one-third of the yield spread of German external bonds over the risk-free rate during the 1930s. Selective default expectations arose from differences in the creditor countries’ economic power over the debtor.

Keywords: sovereign risk; debt default; secondary markets; creditor discrimination; The research leading to these results has received funding from the People Programme (Marie Curie Actions) of the European Union’s Seventh Framework Programme FP7/2007-2013/Under REA grant agreement 608129; e European Unions Seventh Framework Programme FP7/2007-2013/ under REA grant agreement [n◦ 608129 (search for similar items in EconPapers)
JEL-codes: F34 G12 G15 H63 N24 N44 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2024-06-01
New Economics Papers: this item is included in nep-fdg, nep-his, nep-opm and nep-rmg
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Published in Review of Financial Studies, 1, June, 2024, 37(6), pp. 1979 – 2015. ISSN: 0893-9454

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http://eprints.lse.ac.uk/120657/ Open access version. (application/pdf)

Related works:
Journal Article: Selective Default Expectations (2024)
Working Paper: Selective Default Expectations (2023)
Working Paper: Selective Default Expectations (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:120657

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