American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Sovereign Risk and Secondary Markets
American Economic Review
vol. 100,
no. 4, September 2010
(pp. 1523–55)
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)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.100.4.1523JEL Classification
- F34 International Lending and Debt Problems
- G12 Asset Pricing; Trading volume; Bond Interest Rates
- G15 International Financial Markets