Foreign Discount in International Corporate Bonds
59 Pages Posted: 2 Mar 2022 Last revised: 30 Nov 2022
Date Written: June 10, 2022
In the dollar-denominated corporate bond market, 42% of bonds with an amount outstanding of USD 5.9 Trillion are issued by non-US firms. Despite the increasing importance of cross-border financing, foreign issuers are paying an extra premium of 23 bps, compared with their US counterparts. A similar foreign discount exists in the euro-denominated corporate bond and dollar-denominated sovereign bond market. The standard risk and risk aversion can only account for 20% of the discount. I propose a theoretical explanation based on uncertainty aversion and find that about 50% of the discount can be explained by a country-level uncertainty proxy. Taking Covid-19 as an event study, I further document a foreign squeeze effect by showing that foreign dollar bonds suffer higher selling pressure relative to US dollar bonds during market turmoil. Such foreign discount (USA effect) dominates the dollar safety premium (USD effect). My results highlight the foreign discount and foreign squeeze effects in international corporate bonds.
Keywords: Corporate Bond, foreign discount, foreign squeeze, uncertainty aversion, cross-border financing, Covid-19
JEL Classification: G12, G15, F34
Suggested Citation: Suggested Citation