Working Paper: CEPR ID: DP16474
Authors: Olivier Accominotti; Thilo Albers; Kim Oosterlinck
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
JEL Codes: F13; F34; G12; G15; H63; N24; N44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| selective default expectations (G33) | sovereign bond pricing (H63) |
| market segmentation (M31) | selective default probability (G33) |
| selective default probability (G33) | bond yield spreads (G12) |
| creditor countries' economic power (F34) | selective default expectations (G33) |
| news events (G14) | conditional selective default risk (G33) |
| market integration (F02) | selective default risk (G33) |
| market segmentation (M31) | yield differentials (F16) |