NBER Study Analyzes State-Contingent Debt Premium Using 1956 French Bonds
A new National Bureau of Economic Research working paper by Kris James Mitchener and Gonçalo A. Pina investigates the issuance costs and performance of state-contingent debt (SCD) instruments. The study employs a quasi-twin bond strategy, comparing two similar French government bonds issued in 1956: one conventional bond and one SCD bond with coupons linked to industrial production. The authors found that at issuance, the expected yield on the SCD bond was 77 basis points higher than its conventional counterpart. Due to robust post-issuance economic growth in France, the realized premium was significantly larger, reaching approximately 146 basis points. However, rising market prices for the state-contingent bond eventually reduced these spreads to zero by 1964. The premium briefly rose again in May 1968 following an unexpected general strike that severely impacted French industrial production, but it returned to near-zero levels by 1970. This historical analysis provides crucial empirical evidence regarding the pricing dynamics and risk premiums associated with sovereign debt instruments tied to economic performance, offering insights for modern sovereign debt market improvements.
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NBER Study Analyzes State-Contingent Debt Premium Using 1956 French Bonds
A new National Bureau of Economic Research working paper by Kris James Mitchener and Gonçalo A. Pina investigates the issuance costs and performance of state-contingent debt (SCD) instruments. The study employs a quasi-twin bond strategy, comparing two similar French government bonds issued in 1956: one conventional bond and one SCD bond with coupons linked to industrial production. The authors found that at issuance, the expected yield on the SCD bond was 77 basis points higher than its conventional counterpart. Due to robust post-issuance economic growth in France, the realized premium was significantly larger, reaching approximately 146 basis points. However, rising market prices for the state-contingent bond eventually reduced these spreads to zero by 1964. The premium briefly rose again in May 1968 following an unexpected general strike that severely impacted French industrial production, but it returned to near-zero levels by 1970. This historical analysis provides crucial empirical evidence regarding the pricing dynamics and risk premiums associated with sovereign debt instruments tied to economic performance, offering insights for modern sovereign debt market improvements.
National Bureau of Economic Research Working Papers