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

Mattia Osvaldo Picarelli, Aitor Erce and Xu Jiang
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Xu Jiang: ESM

Working Papers from European Stability Mechanism

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.

Keywords: Collective action clause; hold-outs; sovereign risk; bond yields (search for similar items in EconPapers)
JEL-codes: F34 H63 K41 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2018-12-04
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Citations: View citations in EconPapers (6)

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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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