Testing Creditor Moral Hazard in Sovereign Bond Markets: A Unified Theoretical Approach and Empirical Evidence
35 Pages Posted: 19 May 2004
Date Written: March 2004
Abstract
This paper critically evaluates the existing empirical literature on creditor moral hazard in sovereign bond markets, proposes a unified theoretical approach to test for IMF-induced creditor moral hazard, and provides empirical evidence, using daily sovereign bond market spreads of Indonesia and Korea. The results suggest that IMF-related news regarding program negotiations and approval may be associated with creditor moral hazard, but their impact on spreads is short-lived, indicating that creditor moral hazard could be best described as a short-run phenomenon.
Keywords: Creditor moral hazard, financial markets, the IMF, news
JEL Classification: F32, F33, F34
Suggested Citation: Suggested Citation
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