DP12252 Sovereign Bond Prices, Haircuts and Maturity

Author(s): Tamon Asonuma, Dirk Niepelt, Romain Rancière
Publication Date: August 2017
Keyword(s): Bond Pricing, debt restructuring, Sovereign debt
JEL(s): F3, F34, G11
Programme Areas: International Macroeconomics and Finance
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12252

Rejecting a common assumption in the sovereign debt literature, we document that creditor losses ("haircuts") during sovereign restructuring episodes are asymmetric across debt instruments. We code a comprehensive dataset on instrument-specific haircuts for 28 debt restructurings with private creditors in 1999-2015 and find that haircuts on shorter-term debt are larger than those on debt of longer maturity. In a standard asset pricing model, we show that increasing short-run default risk in the run-up to a restructuring episode can explain the stylized fact. The data confirms the predicted relation between perceived default risk, bond prices, and haircuts by maturity.