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MULTIPLE POTENTIAL PAYERS AND SOVEREIGN BOND PRICES

Kim Oosterlinck
Universite Libre de Bruxelles

Loredana Ureche-Rangau
Universite de Picardie

ABSTRACT

Sovereign bonds are usually priced under the assumption that only the sovereign issuer may be responsible of their repayment. In some cases however, bondholders may legitimately expect to be repaid by more than one agent. For example, when a country breaks-up, successor states may agree to recognize their responsibility for part of the debt. Other extreme events, such as repudiations, may lead (and have led) bondholders to consider several bailout candidates at the same point in time. This paper first discusses the theoretical financial implications stemming from an infrequent and challenging situation, namely the existence of multiple potential payers. Then, through a historical precedent, the 1918 Russian repudiation, the paper confirms that the existence of multiple potential payers has a diversification effect which lowers the volatility of the bond price and increases its value. These results are strengthened by a comparison with a closely related standard case of default.

Keywords: Sovereign bonds; Repudiation; Default; Portfolio diversification; Multiple payers; Russia; Romania; Financial history.

JEL classification: F34; G15 ; G33 ; N20 ; N24.


Correspondence:          
Kim Oosterlinck Loredana Ureche-Rangau
Solvay Business School, Pole Cathedrale, 10,
Centre Emile Bernheim, Placette Lafleur BP 2716,
50 avenue F.D. Roosevelt, CP 145/1, 80027 Amiens Cedex 1,
1050 Bruxelles, Belgique, France,
e-mail: koosterl@ulb.ac.be e-mail: loredana.ureche@u-picardie.fr

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