Working Paper: NBER ID: w3961
Authors: Sule Ozler; Harry Huizinga
Abstract: Previous empirical studies of secondary market discounts for developing countries have ignored important creditor country factors. The empirical evidence in this paper indicates that, after controlling for repayment indicators of borrower countries, bank exposure and capital are important determinants of secondary market discounts: an increase in the exposure of large banks to a particular country leads to a decrease in the secondary market discounts on the debt of that country, while an increase in the capital of large banks leads to an increase in secondary market discounts. Among the repayment indicators of developing countries, only debt ratios are found to be significant determinants of the discounts. We suggest that the impacts of exposure and capital can be explained by the presence of deposit insurance. The evidence presented on the stock market pricing of lender banks supports this view.
Keywords: developing country debt; secondary market discounts; bank exposure; capital; deposit insurance
JEL Codes: F34; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bank exposure (F65) | secondary market discounts (G12) |
| bank capital (G21) | secondary market discounts (G12) |
| bank exposure (F65) | perceived risk (D81) |
| bank capital (G21) | risk-taking behavior (D91) |