Does Sovereign Risk Differ for Domestic and Foreign Investors? Historical Evidence from Scandinavian Bond Markets

Daniel Waldenström

No 585, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: This paper shows that geographical investor heterogeneity strongly influences sovereign risk. While standard sovereign debt models mainly attribute the absence of sovereign defaults to foreign creditor retaliation, a new theoretical literature argues that domestic creditors also affect borrowing governments’ default decisions through channels of domestic politics. This paper examines this controversy using a newly assembled dataset on cross-listed Scandinavian sovereign yields traded at markets that abruptly went from integration to segmentation by capital controls and World War II. The results strongly suggest that domestic and foreign bond investors assessed different sovereign risks whereas more standard explanations based on macroeconomic factors, portfolio choice or risk aversion added little explanatory value. The study also documents large effects on recorded asset prices from institutional trading constraints (e.g., price limits), an issue largely neglected by previous research in historical long-run asset returns.

Keywords: Sovereign risk; Investor heterogeneity; Market segmentation; Domestic debt; Political economy; Historical finance; Cliometrics (search for similar items in EconPapers)
JEL-codes: F34 G15 G18 N20 N24 N44 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2005-02-09, Revised 2005-02-18
New Economics Papers: this item is included in nep-fin, nep-his and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:hastef:0585

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