We examine fluctuations in the risk premium on Israeli sovereign debt traded in the US
between 1996 and 1999. We find that, during this period, Israel’s risk premium was
predominantly affected by global events, most notably the crises in Asia and Russia. Domestic
and regional events (e.g. the peace process, political changes, terrorist attacks, and economic
reforms) had a miniscule immediate impact on the risk premium. By contrast, in the year 2000,
Israeli bond prices were more affected by Israel-specific events, perhaps as a result of dramatic
events in that year, or due to the absence of major global emerging market crises. We also
examine abnormal stock returns of Israeli companies traded in the US and find that, in contrast
with Israel’s sovereign debt, some domestic political events appear to have had an impact on
their cost of capital even prior to 2000. Much like Israel’s sovereign bonds, Israeli stock prices
were far more sensitive to domestic events in 2000 than they had been in earlier years.

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* Blass is at E.C.R.G., Peled is at the Bank of Israel Research Department and Yafeh is at the Economics Department, the Hebrew University. We thank Navah Kloner, Renat Lokomet and Elhanan Pareinti for excellent research assistance, Asher Weingarten, Vladimir Lifschitz and the Ministry of Finance for providing us with the data. Yoav Friedman and seminar participants at the Bank of Israel and at a preliminary meeting of the Sapir Forum provided very helpful comments and suggestions.