Abstract
AbstractThis study investigates the risk premia of Canadian debt issuers in the U.S. capital markets under conditions of sovereignty stress. In particular, the impact of separatist activity is considered. The incidence of separation news around the sale of debt issues is associated with a specific increase in the proceeds yield or cost to the issuer, but not the market yield. Debt issues by Quebec parties within the separation news event window had an added cost. The added cost is estimated at more than 0.56% to the issuer or about $1.30 million per average $230.77 million issue. These costs are additional fees that are paid to the investment banking syndicate, but these do not increase the yield to the investors. Brown, Durbin and Evans (BDE) recursive residuals tests support the hypothesis of structural changes over time in the pricing process. Debt issues from other countries facing political risk may be priced in a similar manner.
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