Diversification, Risk Aversion and Expectation in a Holdout Scenario

Abstract

We argue a holdout is not a destructive investor behaviour but a rational investment decision. This investment decision is characterised by the mean-variance approach. We investigate intercreditor conflict by diverse portfolio structure. We demonstrate that at some point during the Greek (2012) and Argentine (2005) debt restructuring programs it was reasonable for the investor to hold out. This model shows that the investment decision is based on the portfolio structure, risk aversion and expected payment of the debtor, so there is no free-rider behaviour. On the contrary, the investor harms herself when playing a destructive or uncooperative strategy.

Keywords: sovereign debt, holdout, mean-variance approach, collective action clause

JEL Classification: G180, H500, H630