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Pricing Sovereign Debt: Foreign versus Local Parameters

44 Pages Posted: 11 Sep 2017  

Michael Bradley

Duke University - Fuqua School of Business

Elisabeth de Fontenay

Duke University School of Law

Irving Arturo De Lira Salvatierra

Duke University

G. Mitu Gulati

Duke University School of Law

Date Written: September 6, 2017

Abstract

A sovereign seeking to raise funds in the bond market may choose to issue the debt under either local or foreign parameters. This decision involves a tradeoff between the sovereign retaining discretion in managing the issue on the one hand and relinquishing control of the issue to third parties on the other. Examining three key bond parameters—governing law, currency, and stock exchange listing—we find that, with few exceptions, investors consider foreign-parameter debt to be less risky than comparable local-parameter debt of the same sovereign. Starting with a sample of 22,605 issuances by 111 sovereigns from 1990 through 2016, we identify a set of 33 sovereigns that have issued foreign- and local-parameter bonds that can be closely matched by issue date and tenor. With the exception of six countries in this set, we find that both investment grade and non-investment grade sovereigns are able to issue their foreign-parameter debt at lower yields relative to their local-parameter debt.

Keywords: Contracts, Pricing, Bonds, Sovereign Debt, Efficient Markets

JEL Classification: F33, F34, G15, K12

Suggested Citation

Bradley, Michael and de Fontenay, Elisabeth and De Lira Salvatierra, Irving Arturo and Gulati, G. Mitu, Pricing Sovereign Debt: Foreign versus Local Parameters (September 6, 2017). Duke Law School Public Law & Legal Theory Series No. 2017-58. Available at SSRN: https://ssrn.com/abstract=3032833

Michael Bradley

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-8006 (Phone)
919-660-7971 (Fax)

Elisabeth De Fontenay

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Irving De Lira Salvatierra

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Gaurang Gulati (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

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