30%. Moreover, we find that bond prices often recover relatively quickly during and after default spells, although the variation across episodes is also large. On average, creditors recoup their pre-crisis investment (measured one year before) within five years after the default; and in 25% of cases (upper quartile), investors recover their losses in less than one year. There are, of course, outlier episodes involving major upheavals such as wars, revolutions, or the break-up of empires (e.g., in Austria-Hungary, China, or Russia). However, in the majority of debt crises, investor losses are partial. Debt repudiation cases are comparatively rare.

On a more general level, our results reveal many parallels to the case of equity. As is the case for stocks, we find that sovereign external bonds show high excess returns coupled with a relatively low return volatility. The seminal work by Mehra and Prescott (1985) showed that standard asset pricing models are not able to reproduce the large empirically observed wedge between risky and riskless assets. Their contribution was followed by a stream of studies on the equity premium puzzle, largely focusing on the United States after World War II (WW2) (see Kocherlakota 1996; Campbell 2003). Compared to the literature on long-run equity returns, our analysis of external bonds covers far more countries, particularly encompassing emerging markets and developing countries. It also goes much further back.<sup>12</sup> There are, however, gaps in the bond pricing series of individual countries, and the market for external sovereign bonds shrinks in the Bretton Woods era of capital controls, and all but disappears during the syndicated bank lending spell of the 1970s and 1980s (our average country coverage is 70 years). There is also research on the “credit spread puzzle” for corporate bonds, typically using data from the past 30 years.<sup>13</sup> The high excess returns on external sovereign bonds have received much less attention, in large part because earlier studies found little evidence of excess returns in the first place (Section 2).

Because we quantify the outcome of each default episode, our analysis moves away from the typical binary approach in the literature where a country is either in default or it is not. Like for currency or inflation crises, orders of magnitude matter. We measure the magnitude of these “credit events” both in terms of haircuts and in terms of amounts in default, which allows identifying the shades of gray across countries and time.<sup>14</sup> The data show that credit events in this market are best described as partial defaults with re-contracting, in the spirit of Bulow and Rogoff (1989), rather than as full defaults, as is typically

> 12 Barro and Ursua (2008) use returns data starting in the late 19th century for about 30 countries using Global Financial Data (GFD) as source. Dimson, Marsh, and Staunton (2001) and Jordà et al. (2017) cover 16 countries, starting in 1900 and 1870, respectively. All three contributions use annual data, as do Mehra and Prescott (1985), who focus on the United States, 1889-1978. We use monthly data and start in 1815, with a country sample starting from a dozen in the 19th century and growing over time.

> 13 Chen, Collin-Dufresne, and Goldstein (2009) and Chen (2010) study the credit spread puzzle for corporate debt and summarize the literature on this issue. Asquith, Mullins, and Wolff (1989) is an early study on the high excess returns on US junk bonds.

> 14 There is already ample data on the occurrence and duration of sovereign defaults (e.g., Standard and Poor’s 2006, Reinhart and Rogoff 2009, or Asonuma and Trebesch 2016), but there is no long-run dataset on sovereign recovery rates thus far.

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