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Pricing contract terms in a crisis: Venezuelan bonds in 2016


Carletti, Elena; Colla, Paolo; Gulati, Mitu G; Ongena, Steven (2016). Pricing contract terms in a crisis: Venezuelan bonds in 2016. Capital Markets Law Journal, 11(4):540-555.

Abstract

As of this writing in June 2016, the markets are predicting Venezuela to be on the brink of default. On June 1, 2016, the 6 month CDS contract traded at about 7000bps which translates into a likelihood of default of over 90%. Our interest in the Venezuelan crisis is that its outstanding sovereign bonds have a unique set of contractual features that, in combination with its near-default status, have created a natural experiment. This experiment has the potential to shed light on one of the long standing questions that sits at the intersection of the fields of law and finance, the question of the degree to which financial markets price contract terms. We find evidence to suggest that at least within the confines of a near-default scenario, the markets are highly sensitive to even small differences in contract language.

Abstract

As of this writing in June 2016, the markets are predicting Venezuela to be on the brink of default. On June 1, 2016, the 6 month CDS contract traded at about 7000bps which translates into a likelihood of default of over 90%. Our interest in the Venezuelan crisis is that its outstanding sovereign bonds have a unique set of contractual features that, in combination with its near-default status, have created a natural experiment. This experiment has the potential to shed light on one of the long standing questions that sits at the intersection of the fields of law and finance, the question of the degree to which financial markets price contract terms. We find evidence to suggest that at least within the confines of a near-default scenario, the markets are highly sensitive to even small differences in contract language.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:October 2016
Deposited On:22 Dec 2016 10:03
Last Modified:23 Dec 2016 04:08
Publisher:Oxford University Press
ISSN:1750-7219
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.1093/cmlj/kmw022
Related URLs:http://cmlj.oxfordjournals.org/content/11/4/540.short (Publisher)
Other Identification Number:merlin-id:13538

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