The Hungarian risk: the premium on Hungarian state bonds, 1881–1914

Abstract

Both states that constituted the Austro-Hungarian Monarchy issued considerable amounts of perpetual bonds from the 1870s to World War I. These bonds constituted the greater part of the state debt, which was relatively larger in Hungary than in Austria. Movements in bond prices were not uniform for different kinds of securities such as gold bonds, paper bonds and bonds of the common debt of the pre-1867 era. Price movements and movements in the spread between Hungarian and Austrian bond yields followed a stochastic trend. Most fiscal factors such as the share of the state debt, and of state expenses, in GDP, the share of state consumption in overall state expenses, the relation between the debt service and the tax revenues, or the deficit in the state budget, had little or no impact. The conversion of debt instruments reveals a high degree of efficiency on the part of investors. Political crises affected relative price movements in the short run but were unimportant in the context of the middle- and long-term development. Throughout the period, Hungarian bonds as compared to Austrian bonds had lower prices in the Vienna Stock Exchange, suggesting a preference of Viennese investors for domestic securities independently from economic and political circumstances.