Does the Past Count? Sovereign Debt during the Classical Gold Standard through the Lenses of Mover Stayer and Markov Chain Models

Abstract

We study sovereign debt markets behaviour during the Classical Gold Standard (CGS) Era (1880-1913), i.e. the rst era of globalization characterized by free move-ment of capital and a xed exchange rate regime. In particular we analyse both the issues of markets memory and the degree of con dence in sovereign debt markets by means of three stochastic models: Markov Chain (MC), Mover Stayer (MS) and Non Homogeneous Markov Chain (NHMC) estimated on two-state transition matrices of countries switching from sound to distressed. Markov Chain and Mover Stayer models beat the Non Homogeneous Markov Chain in tting the data in the CGS period (1880-1913). This result implies both the short memory of the markets towards countries' default history and an increased level of certainty which enables countries to better attract capital from lenders. The lessons learnt from the CGS period could also be relevant to understand sovereign debt markets in the Eurozone today given the striking similarities between the two periods.