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Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs?

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  • Trebesch, Christoph
  • Chamon, Marcos
  • Schumacher, Julian

Abstract

Governments often issue bonds in foreign jurisdictions, which can provide additional legal protection vis-Ã -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.

Suggested Citation

  • Trebesch, Christoph & Chamon, Marcos & Schumacher, Julian, 2018. "Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs?," CEPR Discussion Papers 13020, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13020
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    Keywords

    Law and finance; Sovereign debt; Creditor rights; Seniority;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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