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Abstract
The authors use a quasi-natural experiment to analyze the impact of a particular type of credit enhancement, a government guarantee, on bond liquidity and default risk of the firm. They find that a guarantee (1) dramatically increases the liquidity of a bond, (2) generally reduces the default risk of the firm and pre-existing bonds issued by the firm, and (3) increases the liquidity of pre-existing non-guaranteed debt issued by the same firm. They find that the liquidity improvement caused by a guarantee reduces overall default risk of the firms by 5.84%.
TOPICS: Fixed income and structured finance, credit risk management, legal/regulatory/public policy
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