Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/198866 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7506
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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%.
Subjects: 
sovereign debt
default
risk premiums
investor returns
interest rates
portfolio
yields
coupons
recovery
JEL: 
E40
F30
F40
G10
N00
Document Type: 
Working Paper
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