Bilateral investment treaties and sovereign default risk: Evidence for emerging markets

Research output: Contribution to journalResearch articleContributedpeer-review

Contributors

Abstract

This paper analyses the impact of bilateral investment treaties (BITs) on sovereign default risk using monthly data for 29 emerging markets from 1996 to 2016. Under a BIT, foreign investors can use an international arbitration scheme to enforce compensation claims against the host country's government. We focus on the so far unexplored legal risk associated with BITs since a higher likelihood of government expropriations implicitly increases public debt. We do not find a significant unconditional effect of BITs on sovereign default risk (measured by the month-over-month percentage change in a country's Emerging Market Bond Index). Considering the heterogeneity of BITs and political risk, we find robust and strong negative effects of BITs on sovereign bond returns. In countries with high political risk of expropriation (measured by low executive constraints), we find that the implementation of BITs with strong investor protection is associated with a significantly negative impact on sovereign bond returns (−0.45 percentage points), which compares to roughly 11.7% of bond returns' monthly standard deviation.

Details

Original languageEnglish
Journal International journal of finance & economics : IJFE
Publication statusE-pub ahead of print - 8 May 2024
Peer-reviewedYes

Keywords

Keywords

  • bilateral investment treaty, emerging markets, expropriation, legal risk, political risk, sovereign default risk