The Costs of Sovereign Default: Evidence from Argentina

Abstract

We estimate the causal effect of sovereign default on the equity returns of Argentine firms. We identify this effect by exploiting changes in the probability of Argentine sovereign default induced by legal rulings in the case of Republic of Argentina v. NML Capital. We find that a 1% increase in the probability of default causes a 0.55% decline in the value of Argentine equities. We construct tracking portfolios for the present value of output growth and estimate that an entirely unexpected sovereign default would cause a decline in this measure of between 5.9% and 10.9%.