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

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

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Bibliographic Details
Published in:	Journal of international economics Vol. 114; pp. 164 - 179
Main Authors:	Chamon, Marcos, Schumacher, Julian, Trebesch, Christoph
Format:	Journal Article
Language:	English
Published:	Amsterdam Elsevier 01-09-2018 Elsevier B.V
Subjects:	Creditor rights Law and finance Seniority Sovereign debt Law and finance F34 G12 K22 Sovereign debt Seniority Creditor rights
Online Access:	Get full text
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Summary:	Governments often issue bonds in foreign jurisdictions, which can provide additional legal protection vis-á-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.
ISSN:	0022-1996 1873-0353
DOI:	10.1016/j.jinteco.2018.06.004