From Pigs to Hogs

Authors

Stephen J. Choi
Mitu Gulati, Duke Law SchoolFollow

Document Type

Article

Publication Date

2014

Keywords

sovereign debt, pricing contract terms, eurozone crisis, debt crisis, Event of Default

Abstract

The question of whether, and to what extent, markets price contract terms in government bond issues has been one of considerable debate in the literature. We use a natural experiment thrown up by the Euro area sovereign debt crisis of 2010-2013 to test whether a particular set of contract terms – ones that gave an advantage to sovereign guaranteed bonds over garden variety sovereign bonds – was priced. These contract terms turned out to be important for the holders of guaranteed bonds during the Greek debt restructuring of 2012, where they helped the holders of guaranteed bonds escape the haircut that other holders of Greek sovereign debt suffered. We find evidence that the market did indeed price in the advantage that guaranteed bonds had over other bonds in the months immediately prior to the Greek restructuring. However, we also find that this evidence of highly rational pricing disappears in the post crisis period. And instead, we find what looks like a pricing anomaly, where rational pricing is inverted.

Citation

Stephen J. Choi & Mitu Gulati, From Pigs to Hogs (September 7, 2014)