The Credibility of Private Sector Involvement in the Resolution of Financial Crises

  • Peter Tillmann


To correct the disincentives of liquidity assistance during financial crises, the official sector recently announced attempts to involve the private sector in the resolution of debt crises. This paper empirically tests the reaction of investors to announcements of Private Sector Involvement (PSI). For this purpose we disentangle shifts in risk premia incorporated in excess returns on emerging market bonds into changes in risk and shifts in the price of risk. A regime-switching GARCH-M model is employed to separate two regimes with respect to the market price of risk. It is shown that the likelihood of switching to a state with a high price of risk rises in response to PSI announcements. Thus, the results indicate that burden sharing was credible and effective.


Risk Aversion Risk Premia Moral Hazard Excess Return Stock Index 
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Copyright information

© Springer-Verlag Berlin Heidelberg 2004

Authors and Affiliations

  • Peter Tillmann
    • 1
  1. 1.Institute for International EconomicsUniversity of BonnGermany

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