The Benefits of Reducing Hold-Out Risk: Evidence from the Euro CAC Experiment, 2013-2018

Mattia Osvaldo Picarelli and Aitor Erce

MPRA Paper from University Library of Munich, Germany

Abstract: The introduction of collective action clauses in advanced economies’ sovereign bonds is an understudied phenomenon. An important concern is whether these clauses produce segmentation, pushing apart the price of those bonds issued with and without collective action clauses (CACs). This paper uses the introduction in 2013 of mandatory two-limb CACs in euro area sovereign bonds issued under domestic law to evaluate the price impact of these provisions. In the euro area, bonds with CACs trade at a small premium. On average for those bonds, yields were up to six basis points lower. This average, however, masks heterogeneity. While Germany and Netherlands have not seen a sustained reduction in borrowing costs, in Italy and Spain the effect has been large (between five and ten basis points). These findings support the argument that the introduction of euro CACs in domestic law bonds helped investors reassess the risks associated with those instruments in both countries. impact of these provisions. In the euro area, bonds with CACs trade with a small premium. On average, for those bonds yields were up to six basis points lower. This average, however, masks heterogeneity. While Germany and Netherlands have not seen a sustained reduction in borrowing costs, in Italy and Spain the effect has been large (between five and ten basis points). These findings provide support to the argument that the introduction of euro CACs in domestic law bonds helped investors reassess the risk associated with those instruments in both two countries

Keywords: Collective action clause; hold-outs; sovereign risk; bond yields (search for similar items in EconPapers)
JEL-codes: F3 G12 G18 (search for similar items in EconPapers)
Date: 2018-11-21
New Economics Papers: this item is included in nep-cdm and nep-eec
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Citations: View citations in EconPapers (7)

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https://mpra.ub.uni-muenchen.de/90369/1/MPRA_paper_90369.pdf revised version (application/pdf)

Related works:
Journal Article: The benefits of reducing holdout risk: evidence from the Euro CAC experiment, 2013–2018 (2019)
Working Paper: The Benefits of Reducing Hold-Out Risk: Evidence from the Euro CAC Experiment, 2013-2018 (2018)
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