Abstract
We use stock market data to test cross-sectional implications of theories of sovereign default and provide a market-based estimate of sovereign default costs. We find that the stock prices of firms vulnerable to financial intermediation disruption, or firms more exposed to the government, are particularly sensitive to changes in sovereign credit spreads. This is consistent with theories in which default is costly because it disrupts financial intermediation and damages government reputation. Estimation of a structural valuation model indicates that the market prices stocks as if sovereign default has large effects on vulnerable stocks, translating to a 12% destruction of the value of their productive assets.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 1707-1751 |
| Number of pages | 45 |
| Journal | Review of Financial Studies |
| Volume | 31 |
| Issue number | 5 |
| DOIs | |
| State | Published - May 1 2018 |
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ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
Cite this
The costs of sovereign default : Evidence from the stock market. / Andrade, Sandro; Chhaochharia, Vidhi.
In: Review of Financial Studies, Vol. 31, No. 5, 01.05.2018, p. 1707-1751.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - The costs of sovereign default
T2 - Evidence from the stock market
AU - Andrade, Sandro
AU - Chhaochharia, Vidhi
PY - 2018/5/1
Y1 - 2018/5/1
N2 - We use stock market data to test cross-sectional implications of theories of sovereign default and provide a market-based estimate of sovereign default costs. We find that the stock prices of firms vulnerable to financial intermediation disruption, or firms more exposed to the government, are particularly sensitive to changes in sovereign credit spreads. This is consistent with theories in which default is costly because it disrupts financial intermediation and damages government reputation. Estimation of a structural valuation model indicates that the market prices stocks as if sovereign default has large effects on vulnerable stocks, translating to a 12% destruction of the value of their productive assets.
AB - We use stock market data to test cross-sectional implications of theories of sovereign default and provide a market-based estimate of sovereign default costs. We find that the stock prices of firms vulnerable to financial intermediation disruption, or firms more exposed to the government, are particularly sensitive to changes in sovereign credit spreads. This is consistent with theories in which default is costly because it disrupts financial intermediation and damages government reputation. Estimation of a structural valuation model indicates that the market prices stocks as if sovereign default has large effects on vulnerable stocks, translating to a 12% destruction of the value of their productive assets.
UR - http://www.scopus.com/inward/record.url?scp=85050672087&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85050672087&partnerID=8YFLogxK
U2 - 10.1093/rfs/hhx136
DO - 10.1093/rfs/hhx136
M3 - Article
AN - SCOPUS:85050672087
VL - 31
SP - 1707
EP - 1751
JO - Review of Financial Studies
JF - Review of Financial Studies
SN - 0893-9454
IS - 5
ER -