Economic History Seminar

Du 16/10/2024 de 12:30 à 14:00

R1-09

AOKI SANTAROSA Veronica (University of Michigan)

Contracts without Courts: The Value of Contractual Protection in an Era of Absolute Sovereign Immunit

This project examines contractual provisions in pre-1929 sovereign bonds in order to explore how sovereigns deployed hypothecation clauses to signal their commitment to repay. Although these contract terms were not enforceable in court, a private ordering institution, the London Stock Exchange, refused new listings from defaulting sovereigns which did not reach satisfactory restructuring agreements with bondholders. These agreements appeared to favor bondholders with hypothecation protections. To document how these clauses imposed meaningful constraints on sovereigns, we build a novel data set, consisting of 202,826 monthly returns of 1279 bonds issued by 71 countries in a time span of 60 years, listed in London between 1869 and 1929. We compare the risk and return characteristics of hypothecated and non-hypothecated bonds, and employ modern portfolio theory to quantify the value of contractual commitments.