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Title: Sovereign Bond Prices, Haircuts and Maturity

Author(s): Tamon Asonuma, Dirk Niepelt and Romain Rancière

Publication Date: August 2017

Keyword(s): Bond Pricing, debt restructuring and Sovereign debt

Programme Area(s): International Macroeconomics and Finance

Abstract: 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.

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Bibliographic Reference

Asonuma, T, Niepelt, D and Rancière, R. 2017. 'Sovereign Bond Prices, Haircuts and Maturity'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12252