We develop a novel approach to investigate the presence of financial contagion during European sovereign debt crisis. The novelty lies in modelling bond yield market comovements allowing individual long-run variances be time-dependent and correlations change smoothly between two extreme states according time observable variables. new model has flexibility discern short-run effects on basis vari...

This paper discusses the balance between market pressure and fiscal rules in order to keep public finances on a sustainable path. The critical factors are the financial markets’ ability to provide accurate measures of the stance of fiscal policy and the availability of enforceable rules to act as effective constraints on fiscal policy. In our empirical analysis we find that stricter fiscal rule...

A sovereign’s inability to commit to a course of action regarding future borrowing and default behavior makes long-term debt costly (the problem of debt dilution). One mechanism to mitigate the debt dilution problem is the inclusion of a seniority clause in sovereign debt contracts. In the event of default, creditors are to be paid off in the order in which they lent (the “absolute priority” or...

We examine tracking errors and performance of 31 European bond exchange traded funds (ETFs) during 2007-2010. On average, ETFs outperform their respective benchmarks. Our findings, contradicts recent results from international equity markets that suggest ETFs’ underperformance. The average overperformance during the sample period varies from 10 basis points to 27 basis points. Notable the over-...

In this paper, I study the impact of political risk on sovereign default. An extended model of Alesina and Tabellini (1990) shows that political instability increases the likelihood of default. To test the theoretical implication, a panel logit model is adopted to estimate the effect of political factors, along with other macroeconomic variables on the probability of default. Data from 68 count...

The market for sovereign debt differs from the market for corporate debt in several important ways including the risk of opportunistic default by sovereign debtors, the importance of political pressures, and the presence of international development organizations. Moreover, countries are subject to neither liquidation nor standardized processes of debt reorganization. Instead, negotiations betw...