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The Determinants Of Israel’S Cost Of Capital: Globalization, Reforms And Politics

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  • Asher A. Blass

    (Bank of Israel)

  • Osnat Peled

    (Bank of Israel)

  • Yishay Yafeh

    (Hebrew University)

Abstract

We examine fluctuations in the risk premium on Israeli sovereign debt traded in the US between 1996 and 2000. We find that, during this period Israel’s risk premium was affected predominantly by global events, most notably the crises in Asia and Russia. Domestic and regional events (e.g., the peace process, political changes, terrorist attacks, and economic reforms) had a miniscule immediate impact on the risk premium. In the year 2000, by contrast, Israeli bond prices were more affected by Israel-specific events, perhaps as a result of dramatic events in that year, or due to the absence of major global emerging-market crises. We also examine abnormal stock returns of Israeli companies traded in the US and find that, in contrast with Israel’s sovereign debt, some domestic political events appear to have had an impact on their cost of capital even prior to 2000. Much like Israel’s sovereign bonds, Israeli stock prices were far more sensitive to domestic events in 2000 than in earlier years.

Suggested Citation

  • Asher A. Blass & Osnat Peled & Yishay Yafeh, 2004. "The Determinants Of Israel’S Cost Of Capital: Globalization, Reforms And Politics," Israel Economic Review, Bank of Israel, vol. 2(1), pages 29-54.
    • Handle: RePEc:boi:isrerv:v:2:y:2004:i:1:p:29-54
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    References listed on IDEAS

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    1. Sussman, Nathan & Yafeh, Yishay, 2000. "Institutions, Reforms, and Country Risk: Lessons from Japanese Government Debt in the Meiji Era," The Journal of Economic History, Cambridge University Press, vol. 60(02), pages 442-467, June.
    2. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    3. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    4. Ritter, Jay R, 1991. "The Long-run Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(1), pages 3-27, March.
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    Cited by:

    1. Maurício Yoshinori Une & Marcelo Savino Portugal, 2005. "Fear of disruption: a model of Markov-switching regimes for the Brazilian country risk conditional volatility," Econometrics 0509005, University Library of Munich, Germany.
    2. Asaf Zussman & Noam Zussman & Morten Ørregaard Nielsen, 2008. "Asset Market Perspectives on the Israeli–Palestinian Conflict," Economica, London School of Economics and Political Science, vol. 75(297), pages 84-115, February.

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