Diego Friedheim: Lenders' Expectations and Sovereign Debt Crises Contagion

Seminars - PhD JM Practice Talk - Macroeconomics
Speakers
DIEGO FRIEDHEIM, Bocconi University
12:30 - 13:45
Alberto Alesina Seminar Room 5.e4.sr04 - floor 5 - via Roentgen 1

Abstract: Sovereign debt crises may affect other countries' sovereign bond prices, pressuring their debt rollover process and increasing their default probability. I document that those lenders with less precise GDP forecasts before the Greek crisis put more pressure on the Eurozone periphery countries' debt rollover process than the more precise lenders during the crisis. The rationalization with more empirical support is that lenders rely on categories to form their expectations; those with coarser categories, like the Eurozone periphery, present less precise forecasts and, upon observing a crisis in Greece, update their forecast about other countries in the Eurozone periphery by more than those with finer categories. A quantitative two-country sovereign default model shows that when Greece suffers a crisis, the less precise lenders lower the Italian bond prices by 11 percent more than the Bayesian lender.

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