Bilateral investment treaties and sovereign default risk

Stefan Eichler and Jannik A. Nauerth

No 04/21, CEPIE Working Papers from Technische Universität Dresden, Center of Public and International Economics (CEPIE)

Abstract: This paper analyzes the impact of bilateral investment treaties (BITs) on sovereign bond returns of 25 emerging markets from 1993 to 2016. Under a BIT, foreign investors can use an international arbitration scheme to enforce compensation claims against the domestic government in case of direct or indirect expropriation. We focus on the so far unexplored effects of legal risk associated with BITs on sovereign creditworthiness. We find small unconditional effects of BITs on sovereign bond returns. Taking the heterogeneity of BITs and political regimes into account, we find robust and strong negative effects. In countries with high political risk of expropriation (measured by low executive constraints), we find that the implementation of investor-friendly BITs is associated with a significantly negative impact on sovereign bond returns, accounting for roughly 15% of bond returns' standard deviation.

Keywords: Sovereign default risk; Bilateral investment treaty; Political risk; Legal risk; Emerging markets (search for similar items in EconPapers)
JEL-codes: F30 G12 G15 K33 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-int and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/235560/1/1761750550.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:tudcep:0421

Access Statistics for this paper

More papers in CEPIE Working Papers from Technische Universität Dresden, Center of Public and International Economics (CEPIE) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().