Abstract
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.
I am grateful to Volker Clausen for detailed comments and suggestions. All remaining errors are mine.
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Tillmann, P. (2004). The Credibility of Private Sector Involvement in the Resolution of Financial Crises. In: Frenkel, M., Karmann, A., Scholtens, B. (eds) Sovereign Risk and Financial Crises. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-09950-6_13
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DOI: https://doi.org/10.1007/978-3-662-09950-6_13
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