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American Economic Review: Vol. 100 No. 4 (September 2010)

AER Volume. 100, Issue 4 | Previous ArticleNext Article

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Sovereign Risk and Secondary Markets

Article Citation

Broner, Fernando, Alberto Martin, and Jaume Ventura. 2010. "Sovereign Risk and Secondary Markets." American Economic Review, 100(4): 1523-55.

DOI: 10.1257/aer.100.4.1523

Abstract

Conventional wisdom says that, in the absence of default penalties, sovereign risk destroys all foreign asset trade. We show that this conventional wisdom rests on one implicit assumption: that assets cannot be retraded in secondary markets. Without this assumption, foreign asset trade is possible even in the absence of default penalties. This result suggests a broader perspective regarding the origins of sovereign risk and its remedies. Sovereign risk affects foreign asset trade only if default penalties are insufficient and secondary markets work imperfectly. To reduce its effects, one can either increase default penalties or improve the working of secondary markets. (JEL F34, G12, G15)

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Authors

Broner, Fernando (CREI and U Pompeu Fabra)
Martin, Alberto (CREI and U Pompeu Fabra)
Ventura, Jaume (CREI and U Pompeu Fabra)

JEL Classifications

F34: International Lending and Debt Problems
G12: Asset Pricing; Trading volume; Bond Interest Rates
G15: International Financial Markets