Sovereign Bonds Since Waterloo

79 Pages Posted: 22 Feb 2019

See all articles by Josefin Meyer

Josefin Meyer

Ludwig Maximilian University of Munich (LMU)

Carmen Reinhart

Harvard University - Center for Business and Government; Centre for Economic Policy Research (CEPR); World Bank; University of Maryland - School of Public Affairs; National Bureau of Economic Research (NBER); International Monetary Fund (IMF); Peterson Institute for International Economics; Harvard University, Harvard Kennedy School (HKS), Belfer Center for Science and International Affairs (BCSIA) ; Harvard University - Harvard Kennedy School (HKS)

Christoph Trebesch

Kiel Institute for the World Economy; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

Date Written: February 11, 2019

Abstract

This paper studies external sovereign bonds as an asset class. We compile a new database of 220,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering 91 countries. Our main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns averaged 7% annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of around 4% above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. The observed returns are hard to reconcile with canonical theoretical models and with the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that full repudiation is rare; the median haircut is below 50%.

JEL Classification: F30, F34, G12, G15, N10, N20

Suggested Citation

Meyer, Josefin and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Trebesch, Christoph, Sovereign Bonds Since Waterloo (February 11, 2019). HKS Working Paper No. RWP19-009, Available at SSRN: https://ssrn.com/abstract=3339573 or http://dx.doi.org/10.2139/ssrn.3339573

Josefin Meyer

Ludwig Maximilian University of Munich (LMU) ( email )

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Carmen Reinhart (Contact Author)

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