Multiple Potential Payers and Sovereign Bond Prices

Kim Oosterlinck and Loredana Ureche-Rangau

No 08-011.RS, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: Sovereign bonds are usually priced under the assumption that only the sovereign issuer may be responsible of their repayment. In some cases however, bondholders may legitimately expect to be repaid by more than one agent. For example, when a country breaks-up, successor states may agree to recognize their responsibility for part of the debt. Other extreme events, such as repudiations, may lead (and have led) bondholders to consider several bailout candidates at the same point in time. This paper first discusses the theoretical financial implications stemming from an infrequent and challenging situation, namely the existence of multiple potential payers. Then, through a historical precedent, the 1918 Russian repudiation, the paper confirms that the existence of multiple potential payers has a diversification effect which lowers the volatility of the bond price and increases its value. These results are strengthened by a comparison with a closely related standard case of default.

Keywords: Sovereign bonds; Repudiation; Default; Portfolio diversification; Multiple payers; Russia; Romania; Financial history. (search for similar items in EconPapers)
JEL-codes: F34 G15 G33 N20 N24 (search for similar items in EconPapers)
Pages: 24 p.
Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Multiple Potential Payers and Sovereign Bond Prices (2008)
Working Paper: Multiple Potential Payers and Sovereign Bond Prices (2008)
Working Paper: Multiple potential payers and sovereign bond prices (2008)
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