European Parliament Library

Default Premium, Luis Catão, Rui Mano

Contributor
Abstract
We re-assess the view that sovereigns with a history of default are charged only a small and/or short-lived premium on the interest rate warranted by observed fundamentals. Our reassessment uses a metric of such a “default premium” (DP) that is consistent with asymmetric information models and nests previous metrics, and applies it to a much broader dataset relative to earlier studies. We find a sizeable and persistent DP: in 1870-1938, it averaged 250 bps upon market re-entry, tapering to around 150 bps five years out; in 1970- 2011 the respective estimates are about 400 and 200 bps. We also find that: (i) these estimates are robust to many controls including on actual haircuts; (ii) the DP accounts for as much as 60% of the sovereign spread within five years of market re-entry; (iii) the DP rises with market exclusion spells. These findings help reconnect theory and evidence on why sovereign defaults are infrequent and earlier debt settlements are desirable
Table Of Contents
Cover; Abstract; 1 Introduction; 2 Theory; 3 Empirical Specification; 4 Dataset; 5 Estimation; 5.1 Econometric Controls; 5.2 Regression Results; 5.3 Default Premium Estimates; 5.4 Fundamentals vs. Default Premium; 6 Concluding Remarks; A: Appendix I; References
Language
eng
Literary Form
non fiction
Note
Description based upon print version of record
Physical Description
1 online resource (58 p.)
Specific Material Designation
remote
Form Of Item
online
Isbn
9781513571362

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