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QÖC: R. Anton Braun (Fed of Atlanta)

28.04.2016 | 17:00 c.t.

Why Prices Don't Respond Sooner to a Prospective Sovereign Debt Crisis.


Since 2008 actions have been taken in Europe and elsewhere that increase the cost of short-selling sovereign debt. We show that such actions can have a profound effect on the timing and magnitude of price responses to bad news in periods leading up to a sovereign default. When financial markets are frictionless, prices drop instantly in response to bad
news even if the prospect of a crisis is very remote. Imposing costs on short-selling disrupts this dynamic. Government bond prices exhibit no response to bad news when the prospects are remote. Instead price declines only occur immediately prior to a sovereign default and then in a nonlinear way.

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