Journal Article

Foreign-law bonds: Can they reduce sovereign borrowing costs?

Journal of International Economics, (114) 164-179 Download PDF

Governments often issue bonds in foreign jurisdictions, which can provide additional legal protection vis-à-vis domestic bonds. This paper studies the effect of this jurisdiction choice on bond prices. We test whether foreign-law bonds trade at a premium compared to domestic-law bonds. We use the euro area 2006–2013 as a unique testing ground, controlling for currency risk, liquidity risk, and term structure. Foreign-law bonds indeed carry significantly lower yields in distress periods, and this effect rises as the risk of a sovereign default increases. These results indicate that, in times of crisis, governments can borrow at lower rates under foreign law.


Marcos Chamon
Julian Schuhmacher


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JEL Classification
F34; G12; K22

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