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Selective default expectations

Accominotti, Olivier, Albers, Thilo and Oosterlinck, Kim (2023) Selective default expectations. Review of Financial Studies. ISSN 0893-9454

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Identification Number: 10.1093/rfs/hhad087


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.

Item Type: Article
Additional Information: © 2023 The Author
Divisions: Economic History
JEL classification: F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt; Debt Management
N - Economic History > N2 - Financial Markets and Institutions > N24 - Europe: 1913-
N - Economic History > N4 - Government, War, Law, and Regulation > N44 - Europe: 1913-
Date Deposited: 06 Nov 2023 16:42
Last Modified: 19 Apr 2024 13:45

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