research questions. Most obviously, price-based returns can be traced over time, by computing time series of daily, monthly, or yearly returns.

Lindert and Morton (1989) conducted the most comprehensive study on long-run sovereign bond returns thus far. They compute IRRs for 10 countries between 1850 and 1983, covering more than 1,000 sovereign, sub-sovereign, and corporate bond instruments. They find average realized nominal returns of 4.5%, realized real returns of 2.5%, and excess returns of 0.4%. In Appendix B3.1, we compare our results with theirs in detail and present a conceptual section on the different return measures (using their data as cleaned by Esteves [2013]). At the bond level, we find very similar results when comparing IRRs with price-based holding period returns. At the aggregate level, however, the reported averages by Lindert and Morton (1989) are lower, for two reasons that are less of a concern in our analysis. First, two outliers (Russia and Turkey) decrease the average return in their sample. After WW1, both countries entered defaults that took decades to resolve, due to Russia’s Communist revolution and the breakup of the Ottoman Empire, respectively. In our much broader sample, outliers and lengthy defaults of individual bonds carry less weight. Second, Lindert and Morton (1989) include municipal and corporate bonds, which leads to lower aggregate returns, as we show in the appendix. We focus on sovereign bonds only, which have higher returns, on average. Another reason why their averages seem lower is that Lindert and Morton (1989) show buy-and-hold returns only, while we focus on average annual portfolio returns, as is standard in the finance literature. We nevertheless show geometric returns throughout our paper and researchers using our dataset can compute holding period returns for any period of their choosing.

Eichengreen and Portes (1988, 1991) focus on the interwar years and show that these were a bad period for investing in external bonds. Over the decade of the 1920s, nominal rates of return were around 4%5%, which is similar to what we find in the 1920s and only slightly higher than the returns on UK or US government bonds.<sup>16</sup> For an era that predates our Waterloo starting point, Drelichman and Voth (2011) also calculate IRRs and find substantive (profitable) returns on short-term loans to King Philipp II of Habsburg Spain, despite his notorious serial defaults.<sup>17</sup> Klingen, Weder, and Zettelmeyer (2004) study the return performance of sovereign debt in a large sample of developing countries between 1970 and 2000, including, importantly, the dominant form of lending in that era, syndicated bank loans. To estimate returns they use aggregate bank and bond flows, public and

> 16 These averages combine sovereign, sub-sovereign (e.g., regional), and corporate bonds. Less than 20% of bonds in Eichengreen and Portes (1988, 1991) were issued by a sovereign.

> 17 There is also a literature studying the overall portfolio return of British overseas investments before WW1 using price data, but with no emphasis on sovereign debt. Edelstein (1982) finds that British investors gained a higher return abroad than at home, using returns on 566 foreign stocks and bonds (private and sovereign), 1870-1913. Goetzman and Ukhow (2006) use the same data but apply modern portfolio theory. Chabot and Kurz (2010) compute returns on more than 4,000 stocks and bonds (private and sovereign) trading in the United Kingdom and the United States during 1866-1907. They report significant excess returns on foreign government bonds compared with UK government bonds. None of these contributions mentions how the numerous sovereign defaults and restructurings are accounted for.

6