Dollar Eurobond and U.S. Bond Pricing

Abstract

This study develops equilibrium yield relationships between otherwise similar dollar denominated Eurobonds and U.S. bonds with the use of supply and demand conditions and the standard arbitrage argument. It them empirically tests the hypothesis that no yield differentials exist between similar securities in these two markets. A matched pair sample of these bonds is obtained on the basis of five criteria: (a) same parent; (b) same rating; (c) similar coupon rates; (d) similar time to maturity; and (e) yield observations from the same month. Empirical results obtained during 1975 to 1983 shows that dollar Eurobond yields do not differ from domestic bond yields for comparable securities. This implies that these two markets are either devoid of systematic and material imperfections, or if any such imperfection do exist, their pricing influence is similar in both markets. It is also observed that issue size, issuer's rating and the market's familiarity with the issuer do not uniquely influence Eurobond pricing any differently than domestic U.S. bond pricing.