Pricing Sovereign Debt: Foreign Versus Local Parameters

Abstract

Sovereign bonds may be issued under either local or foreign parameters. This decision involves a tradeoff between the sovereign retaining discretion in managing the issue and relinquishing control to third parties. Examining three key bond parameters − governing law, currency, and stock exchange listing − we find that investors generally consider foreign‐parameter debt to be less risky than comparable local‐parameter debt issued by same sovereign. By matching the foreign‐ and local‐parameter bonds of sovereigns that have issued both, we find that, with few exceptions, both investment grade and non‐investment grade sovereigns are able to issue their foreign‐parameter bonds at relatively lower yields.

Keywords: contracts, asset pricing, bonds, sovereign debt, currency risk, governing law