Sovereign Bonds since Waterloo
This paper studies external sovereign bonds as an asset class. It compiles a new database of 266,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering up to 91...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2022
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/undefined/243451642707009657/Sovereign-Bonds-since-Waterloo http://hdl.handle.net/10986/36877 |
| Summary: | This paper studies external sovereign
bonds as an asset class. It compiles a new database of
266,000 monthly prices of foreign-currency government bonds
traded in London and New York between 1815 (the Battle of
Waterloo) and 2016, covering up to 91 countries. The 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 average more than
6 percent annually across two centuries, including default
episodes, major wars, and global crises. This represents an
excess return of 3–4 percent above US or UK government
bonds, which is comparable to stocks and outperforms
corporate bonds. Central to this finding are the high
average coupons offered on external sovereign bonds. The
observed returns are hard to reconcile with canonical
theoretical models and the degree of credit risk in this
market, as measured by historical default and recovery
rates. Based on an archive of more than 300 sovereign debt
restructurings since 1815, the authors show that full
repudiation is rare; the median creditor loss (haircut) is
below 50 percent. |
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