This paper estimates the cost of sovereign default by using novel econometric methods-dynamic local projections applied to a sample that is re-randomised using inverse propensity score weights. We find that the impact of default on output is negative, significant and persistent-around 2.8% of GDP on impact and 4.8% at peak. The downturn is driven by sharp falls in investment, accompanied by a collapse in gross trade. The cost rises dramatically if the default is followed by a systemic banking crisis, peaking at 9.5% GDP. Our findings suggest that while autarky costs play an important role, sovereign-banking spillovers are central to the cost of default.

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This paper presents annual stock market capitalization data for 17 advanced economies from 1870 to today. Extending our knowledge beyond individual benchmark years in the seminal work of Rajan and Zingales (2003) reveals a striking new time series pattern: over the long run, the evolution of stock market size resembles a hockey stick. The stock market cap to GDP ratio was stable for more than a century, then tripled in the 1980s and 1990s and remains high to this day. This trend is common across countries and mirrors increases in other financial and price indicators, but happens at a much faster pace. We term this sudden structural shift "the big bang" and use novel data on equity returns, prices and cashflows to explore its underlying drivers. Our first key finding is that the big bang is driven almost entirely by rising equity prices, rather than quantities. Net equity issuance is sizeable but relatively constant over time, and plays very little role in the short, medium and long run swings in stock market cap. Second, much of this price increase cannot be explained by more favourable fundamentals such as profits and taxes. Rather, it is driven by lower equity risk premiaa factor that is linked to subjective beliefs and can be quite fickle, and easily reversible. Third, consistent with this risk premium view of stock market size, the market cap to GDP ratio is a reliable indicator of booms and busts in the equity market. High stock market capitalization-the "Buffet indicator"forecasts low subsequent equity returns, and lowrather than high-cashflow growth, outperforming standard predictors such as the dividend-price ratio.

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