Working Paper: CEPR ID: DP13020
Authors: Marcos Chamon; Julian Schumacher; Christoph Trebesch
Abstract: Governments often issue bonds in foreign jurisdictions, which can provide additional legal protection vis-à-vis domestic bonds. This paper studies the effect of this jurisdiction choice on bond prices. We test whether foreign-law bonds trade at a premium compared to domestic-law bonds. We use the euro area 2006-2013 as a unique testing ground, controlling for currency risk, liquidity risk, and term structure. Foreign-law bonds indeed carry significantly lower yields in distress periods, and this effect rises as the risk of a sovereign default increases. These results indicate that, in times of crisis, governments can borrow at lower rates under foreign law.
Keywords: sovereign debt; creditor rights; seniority; law and finance
JEL Codes: F34; G12; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Legal jurisdiction (K41) | Bond yield (G12) |
| Sovereign default risk (F34) | Foreign-law premium (K39) |
| Credit default swap (CDS) implied risk-neutral default probability (G33) | Foreign-law premium (K39) |