Israeli Government Debt:

Altruistic Investors in the Absence of Arbitrageurs

Matthew Salzberg

Presented to the Department of Economics

in partial fulfillment of the requirements
for a Bachelor of Arts degree with Honors

Harvard College
Cambridge, Massachusetts

March 17, 2005

1
 ABSTRACT

In this paper, I examine the market for non-negotiable Israeli government debt in

order to understand unconventional investor motivations. Using a unique dataset

provided by the Israeli government, I find that investors in these bonds partially exhibit

“altruistic” preferences. In fact, I show that investors increase their demand for bonds in

the face of both greater terrorist attacks and religious holidays as a way of supporting the

state. Furthermore, I find that investors overweight the importance of the nominal yield

on these bonds relative to benchmark investments and underweight the importance of the

Israeli default risk premium. Consequently, the State of Israel is able to uniquely harness

the goodwill of investors in order to raise capital at favorable terms.1

1
Acknowledgements: I would like to thank my advisors Professor Jeremy Stein and Professor Jeffrey
Miron for their valuable advice and continuous feedback during the entire thesis-writing process.
Furthermore, the successful completion of this paper was made possible by the wonderful people at the
Israeli Ministry of Finance and the Development Corporation for Israel. Specifically, I would like to thank
Shirley Strifler, Joseph Rychalski and Raphael Rothstein for being kind enough to assist a complete
stranger with an unusual data request. I owe thanks to Ryan Geraghty for his thoughtful comments. Lastly,
I would like to thank my parents for their continued support. They have been a source of invaluable
encouragement and good ideas. Special thanks are deserved by my mother, whose annual purchase of
Israel Bonds inspired this entire project.

2
 Table of Contents

Abstract and Acknowledgements 2

Table of Contents 3

I. Introduction 4

II. Literature Review and Background 6

III. Three: Theory: A Model for the Israel Bonds Market 11

IV. Empirical Strategy 16

a. The Casual Effect of Altruistic Events on Quantity and Spread 17
b. Demand Effects 19

V. Data 24
a. Israel Bond Instruments 24
b. Constructing Comparable Investment Variables 30
c. Constructing Altruism Indicators and Event Variables 32

VI. Evidence 36
a. Equilibrium Quantity Results 36
b. Event Salience 41
c. Equilibrium Yield Changes 43
d. Demand-Only Effects 47

VII. Conclusion 50

VIII. References 53

IX. Figures and Tables 54

Mathematical Appendices 76
Mathematical Appendix A 76
Mathematical Appendix B 77

Appendices 79
Appendix A: Israel Bonds Marketing Materials 79
Appendix B: Israel Bond Prospectus Features 81

3
I. Introduction

Traditionally, economists have viewed financial investors as fully-rational, profit-

seeking individuals. They demand financial assets in an effort to maximize monetary

return while simultaneously minimizing the associated risk. Recently, however, much

interest has been given to behavioral approaches to finance, which take into account a

greater variety of investor motivations. The current debate over Harvard Management

Company’s holdings of PetroChina, for example, demonstrates that the investment

decision for some investors includes political and ethical concerns—in this case, over

genocide in Sudan. Similarly, ethical investment funds allow investors to maintain

portfolios which only hold those companies that they deem as “ethical,” or socially

desirable. For instance, some investors choose only to hold environmentally-friendly

stocks. As more and more research has begun to document, the existence of broader

investor motivations in specific markets and circumstances requires a rethinking of

traditional economic models.

Of particular interest to practitioners should be how behavioral approaches to

finance may be used to improve macroeconomic policy outcomes. In other words, can

countries use non-private investor motivations to their advantage? For years,

governments have attempted to use social forces and civically-minded marketing to lower

their cost of debt capital. For instance, the governments of most developed nations used

“War Bonds” to raise capital during both World War I and World War II. These bonds

partially relied on the patriotic sentiments of citizens to raise capital for the war effort.

During World War I, the United States government marketed both “Liberty Bonds” and

“Victory Bonds” as a way to capitalize on the patriotism of its citizens and their support

4
for the war. More recently, the United States government began issuing “Patriot Bonds”

after the 9/11 terrorist attacks, which serve as patriotic versions of U.S. savings bonds. If

investors exhibit “altruism” or “patriotism” as motivations for investment decisions

regarding government debt, policy makers might be able to use this information to tailor

capital raising schemes more efficiently and lower a country’s effective cost of debt

capital. Consequently, a lower cost of capital helps save a country money and makes

more investment projects efficient to undertake.

In this paper, I examine one of the largest known governmental programs of this

type, the Israel Bonds program, implemented by the State of Israel. This program

markets non-negotiable government debt to “altruistic” investors in the United States and

Canada as a way to support the State of Israel. For the purposes of this research, I have

been provided with a unique dataset by the Ministry of Finance of Israel, which allows

analysis of changes in prices (yields) and quantities of these securities. By looking at

various events which are likely correlated with altruistic sentiment, like religious holidays

and terrorist attacks, I examine whether investors in these securities react differently to

political and religious news events than purely profit-seeking individuals.

The next chapter of this paper provides background information on investor

motivations and the Israel Bonds program. In chapter 3, I develop a simple model of the

Israel Bonds market to provide an intuition for how and why altruism enters into the

supply and demand decision. Chapter 4 expands upon this model to explain how it is

possible to identify altruistic effects in an empirical context. Chapter 5 describes the

particulars of my data and chapter 6 reports my findings. Finally, I conclude in chapter 7.

5
II. Literature Review and Background

Diverse investor motivations have recently become a subject of research in

finance, notably with regard to investment in “ethical” funds. The development of these

investment funds, where investors limit their portfolios to specific companies that fulfill a

set of “socially responsible” criteria, is still relatively new. Cullis, Lewis and Winnett

(1992) document the growth in ethical unit trusts in the United Kingdom. Theoretically,

one would expect that if investors weigh social or ethical factors when making an

investment decision, they must forgo higher levels of financial return per unit of risk.

This is because an investor who is maximizing return will chose a different optimal

portfolio than an investor who is maximizing return with other considerations

simultaneously. The latter investor will substitute between financial return and these

other factors, thereby choosing a portfolio with a less-than-maximum return at a given

risk level.

Empirically, however, the results concerning whether ethical investors receive

lower returns have been mixed. Diltz (1995), Sauer (1997) and Guerard (1997) find that

there is no statistical difference between ethical and non-ethical performance in the

United States. Similarly, Statman (2000) and Gregory, Matatko and Luther (1997)

conclude that there is no difference between the performance of ethical and non-ethical

unit trusts in both the United Kingdom and the United States. Yet, other studies do find

that ethical funds under-perform their benchmarks. For instance, Tippit (2001) finds that

ethical mutual funds in Australia under-perform an index benchmark by 1.5% per annum

Furthermore, Ali and Gold (2002) find that investors lose 0.7% per year when companies

in non-ethical industries are removed from a market portfolio.

6
 This body of research has focused largely on firm-level securities and diversified

portfolios where there are a variety of outlets and substitutes for a particular type of

“ethical” investing (i.e. there are many investment outlets for an investor who wants to

support environmentally friendly companies). As a result, an investor may not have to

make as serious a departure from his optimal portfolio in order to invest ethically in these

cases. This is because as more securities become eligible for him, his accessible

investment universe will approach the market and he will be closer to being able to

construct the risk-return maximizing portfolio. Yet, the fact that investors may be willing

to forgo even some financial return in order to invest in these “ethical” funds indicates

that investor motivations may be more complex than traditional economics suggests.

Unfortunately, little research has been done to see the effects of “ethical”

investing on the cost of capital of a sovereign government, despite the fact that countries

deliberately market their securities with the hopes of attracting these types of investors.

Notably, governments have tried to tie their bonds to a political or patriotic cause in times

of war. Rockoff (2004) looks at U.S. war bonds from World War I and concludes that

they were, in fact, priced to sell as purely financial investments. His analysis rests on the

fact that the spread between Liberty Bonds and municipal bonds does not shrink after the

armistice that ended the war. The bonds traded during World War I, however, were not

as prominently marketed as later patriotic bond issues and were allowed to trade on the

open market. Since they traded on the market, prices reflected what profit-seeking bond

traders were willing to pay, rather than what the civically-minded investor would pay.

After World War I, however, “war bonds” were sold as non-marketable securities, which

prevented non-civically minded investors from selling and causing the premium to

7
vanish. Many have speculated that the government was more successful in raising debt at

below-market rates during World War II; although, no empirical research has been done

on these bonds.

Perhaps the largest governmental program still at work today is the Israel Bonds

program, which sells Israeli government debt in the United States and Canada as a way

for Diaspora Jews and other investors sympathetic to Israel to support the state. This is

done through a retail agency called the Development Corporation for Israel (DCI), a

NASD-registered broker/dealer headquartered in New York, which markets the debt in

the United States. Since these bonds are non-transferable, arbitrageurs cannot sell and

drive prices towards their fundamental values. As a result, these bonds provide a unique

opportunity to search for price and quantity fluctuations caused by the altruistic sentiment

of investors.

The program has been operating since 1951 and has contributed significantly to

Israel’s fundraising ability abroad. To date, bond sales have exceeded $25 billion.

Relative to the size of the external debt, the program constitutes a large share of borrowed

funds (Figure 1). Indeed, as of September 2004, Israel Bonds accounted for 33.3% of

Israel’s external debt of approximately $30 billion and approximately 8% of the country’s

total debt.

While sales from the bonds are designated by Israel’s Ministry of Finance for

general use, DCI highlights the development projects to which they contribute as part of

the marketing campaign. For instance, the DCI website highlights the fact that the funds

go towards “nation-building” and “economic infrastructure,” like agriculture, energy,

security and transportation. In fact, it is explicitly stated in the prospectuses of the Israel

8
Bonds that these “offerings may have a special appeal to persons with an interest in the

State of Israel rather than the general public.” By linking Israel’s prosperity and security

to sales of these bonds, DCI attempts to capitalize on the goodwill of investors in a way

that is unique among other sovereign nations. Appendix A provides examples of the type

of marketing materials used to sell these bonds.

In a recent paper by the Bank of Israel, Rechavi and Weingarten (2003) argue that

the goal of the Israel Bonds program is partially to “decrease the cost of debt” of the State

of Israel. In fact, they argue that in the program’s early years marketing was done

specifically to those Jews with a direct or indirect tie to the Holocaust. Since these Jews

saw the purchase of Israel Bonds as a way to make a contribution to the State of Israel

(and a good cause), they were willing to invest at rates favorable to the Bank relative to

other credit sources. Rechavi and Weingarten argue that the “Second Generation” of

Jews is willing to pay a smaller premium to support the State of Israel than the earlier

Holocaust generation; however, they believe that they are still willing to buy the bonds at

submarket rates. Unfortunately, however, no empirical evidence has been shown to

support these claims.

Previous research by Liviatan (1980) suggests, however, that the Israel Bonds

program itself is non-economic in nature—that is, the cost of debt at which Israel is able

to issue securities though the program is not more favorable than the going market rates.

While he observes that the direct interest on the bonds is favorably low, other factors

make the effective interest on the bonds comparable to other credit sources. For instance,

the likelihood that the sale of Israel Bonds crowds out charitable transfers through

charities like the United Jewish Appeal (UJA) may raise the effective cost of the bonds.

9
Furthermore, DCI incurs above-average marketing and distribution costs in order to

implement the program. Taken together, he concludes that the overall cost of the loan

resembles that of an ordinary commercial loan from abroad. His analysis, however, only

concludes that at that point in time the effective interest on the bonds is comparable to

other credit sources. Over the years, he admits, the effective interest on these bonds has

varied. In fact, Liviatan (1980) cites the Six Days War as an event which induced

substantial capital inflow through the program. Had investors been fully rational, one

would expect this event to raise the risk premium that investors demand for Israeli debt,

and in turn, make Israel Bonds less attractive investments, all else equal. However, it

seems that the opposite occurs— the war caused the bonds to become more attractive

investments. By better understanding investor motivations in these securities, it is

possible that the state can use this information to further tailor the Israel Bond program

and enhance its cost-effectiveness.

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III. Theory: A Model for the Israel Bonds Market

In this chapter, I will develop a simple model of the Israel Bonds market. As with

all economic models, this model greatly simplifies reality. This simplified case, however,

will give the reader a better intuition for how and why altruistic events and interest rates

can factor into both the supply and demand decision. In the next chapter, I will expand

the model to a form that can be easily used to identify these effects in an empirical

context.

The market for Israel Bonds is unique in the world of financial markets.

Traditional theory predicts that frictionless markets permit unlimited arbitrage, driving

security prices to their fundamental values associated with the future cash flows of the

security discounted at a rate appropriate to the risk. In the market for Israel Bonds,

however, arbitrage is impossible. The government mandates that these securities are non-

negotiable, which means that investors can buy, but they cannot sell. Consequently, there

is no guarantee that the prices of these bonds are associated with their fundamental

values. Furthermore, the absence of arbitrageurs means that the traditional finance

conception of inventors with perfectly elastic demand curves is not necessarily a good

description of this market.

Since prices may not reflect their fundamental values, it is reasonable to model

the Israel Bonds market with a system of supply and demand functions. In the model, it

is assumed that demand is a function of the spread of the bond and altruism, which is

exogenously shifted by news events such as terrorist attacks. Investors care about the

spread of the bond (i.e. how much it yields relative to a benchmark investment) rather

than the nominal yield because the bond only constitutes a small part of a diversified

11
portfolio of investor holdings. When choosing how to allocate a marginal dollar of

capital, investors will analyze these bonds relative to their other opportunities. As a

result, the spread captures this important opportunity cost of funds2. The demand for

bonds is assumed to be linear and can be described as:

Equation 1.1

Qdt = at + b * st

where Qdt is the quantity of bonds demanded in period t, st is the spread on the bonds in

period t, b is a positive constant, and at is the level of altruism in period t.

Next, I will describe the supply decision. According to the Israeli government,

the Ministry of Finance sets annual fundraising quotas for bond sales planned in

accordance with the government’s foreign currency requirements (Rechavi and

Weingarten, 2003). The model assumes that the Ministry sets bond spreads each period

to minimize the cost of debt, while maintaining this exogenous quota3. The Ministry is

concerned with the spread on the bonds rather than the nominal interest rate because the

Israel Bonds market is only one of several possible avenues to raise capital.

Consequently, the spread will indicate the cost relative to other sources4. The Ministry’s

minimization problem over t periods of changing interest rates becomes:

2
In the model, the spread is assumed to be equal to the nominal yield on the bond minus a comparable
investment. This comparable investment can be decomposed into two components: the U.S. treasury rate
(the return required to compensate investors for the time value of money) and the Israeli default risk
premium (the excess return required to compensate investors for the risk of default on the debt). st = yield –
(U.S. rate + risk premium) where risk premium is the difference between Israeli tradable debt and the U.S.
rate. Since the U.S. rate and the risk premium are determined in different markets, they can be considered
exogenous, and are thus, not included separately in the model for simplicity.
3
While it is simplest here to assume supply and demand both react on the same time horizon, in practice
this does not occur. In fact, the Ministry of Finance sets a fixed nominal rate for an entire sales period
(generally, one month) and allows investors to buy as many bonds as they demand at that price within the
period.
4
In the model, I assume that the Ministry and investors demand spread relative to the same benchmark
investment. In practice, this may not be true. It is possible that unsophisticated investors, or those with
altruistic motivations, may be overly sensitive to the nominal yield and less sensitive to the risk premium
than rational economic actors. The possibility that investors may get the benchmark rate component of the
spread “wrong” is discussed in more detail in chapter 6.

12
 minimize Σ (Q s
t * st)
subject to Σ Q s
t =k

where Qst is the quantity of bonds supplied in period t, and k is the annual fundraising

quota. The supply function is defined by the spreads, st, which the Ministry sets each

period to fulfill this condition. Using constrained minimization, one finds that the

Ministry sets each period’s spread such that:

dQst/dst * st + Qst = λ * dQst/dst

which implies that rates are set according to the following supply function5:

Equation 1.2

st = λ + c * Qst -1

where λ and c are constants with c > 0. If the Ministry is sufficiently forward looking

and can foresee the shape (or at least form expectations) of the demand function for each

of the t periods, and one assumes that the demand function changes from period to period

only in terms of the altruism variable, at (which causes shifts in the curve), it follows that

rates will be set lower in periods where anticipatable altruism is higher.

In equilibrium, the quantity supplied must equal the quantity demanded.

Combining equation 1.1 and equation 1.2, and taking comparative statics, it is clear that

in equilibrium:

st = λ + c * Qdt -1 = λ + c * (at + b * st) -1

Equation 1.3

dst/dat = [ - c * Qdt-2 ] / [ 1 + bc * Qdt-2 ]

Equation 1.4

5
See Mathematical Appendix A for a proof.

13
 dQt/dat = 1 / [ 1 + bc * Qdt-2 ]

From this, it follows that dst/dat < 0 and dQt/dat > 0 for all upward sloping supply and

downward sloping demand curves. Consequently, it is clear that under these

assumptions, one will observe lower spreads and higher quantities transacted in periods

where anticipatable altruism is higher.

In the model, altruism only enters as a parameter in the demand function when

considering the market within years. This is because when the annual fundraising quota

is constant, the Ministry of Finance’s only goal is to minimize the cost of debt.

Therefore, movements of prices and quantities within the year must be related to altruism

shocks on demand. It is plausible, however, to think that the Ministry’s annual

fundraising quota may change in relation to altruistic events, such that movements in

prices and quantities across years may be the result of both supply and demand shifts.

For instance, the government may have a need for greater capital at times with more

frequent altruistic events like terrorist attacks in order to pay for security needs.

Alternatively, the state may have an interest in encouraging American Jews to hold its

securities to align their financial well-being with the policy preferences of Israel. For

example, if Israel needs U.S. aid, a U.S. bondholder may be more likely to support pro-

Israeli policies if he holds Israeli bonds. If the goal of the program is to maintain contact

with Diaspora Jews and influence country policy preferences in relation to Israel, the

benefits of policy leverage are likely higher in times of turmoil when attacks are high6.

Since the annual fundraising quota changes infrequently, it seems intuitive that

over relatively short time horizons the effect of altruism on supply should be small

6
There is some evidence that this may at least be partially true. Rechavi and Weingarten (2003) explicitly
recognize one of the program’s goals as maintaining “contact with Diaspora Jews.”

14
relative to the effect of altruism on demand. Consequently, it is probably a reasonable

simplifying assumption that the annual fundraising quota may be considered exogenous.

In order to be sure, however, the analysis in this paper will allow for the possibility that

supply may be independently affected by the same events that cause altruism in investors.

15
IV. Empirical Strategy

In this paper, I examine the Israel Bonds market in order to determine whether

“altruistic” investors react differently to political and religious news events than profit-

seeking investors. To do this, I analyze several types of events to find out whether they

cause “altruistic” shifts in the demand for bonds. The two principal kinds of events

considered are Jewish religious holidays and Israel-specific news events, like terrorist

attacks. I choose these events because of their likely tie to altruistic sentiment for the

State of Israel. It is assumed here that altruism is at least partially caused by empathy

with the misfortune of others. If this is the case, one would expect that terrorism and

violence tend to evoke feelings of community and sympathy in investors. Furthermore,

because of Israel’s unique significance to the Jewish religion, altruism may also be partly

religiously motivated. While technically religiously-motivated altruism may actually be

guilt or some other emotion, it can be considered as part of altruism for the purposes of

this paper (defined as the selfless contribution to the demand of bonds).

In this chapter, I first examine whether altruism is casually related to the quantity

of bonds transacted. In other words, are higher equilibrium quantities observed following

events that should increase altruism or in periods with more frequent altruistic events?

Secondly, I examine whether altruism is casually related to the equilibrium spreads set

for each period. Do spreads rise or fall in tandem with altruistic events? Finally, I show

how it is possible to use these casual effects to estimate the portion of quantity

movements associated only with demand shocks.

16
The Casual Effect of Altruistic Events on Quantity and Spread

To first test whether quantities move in relation to altruistic events, a reduced

form regression will be run in the form:

Regression 1.1

lnQi,t = ρ0 + ρ1 * holiday t + ρ2 * terrorism t+ ρ3 * US rate i,t

+ ρ4 * Riskp i,t + ρ5 * timevar t + ρ6 * instrument i + ρ7 * dow t

where lnQi,t is the log-transformed sales for instrument i in period t, instrument i is a

dummy variable for each of the 3 instrument types, holiday t is an indicator of religious

holidays, terrorism t is an indicator of terrorist attacks, dow t is a dummy variable for each

day of the week (to allow for cyclical patterns in sales), timevar is a time variable that

allows for a time trend in the series, Riskp i,t is an interaction variable for each of the i

instruments with the Israeli default risk premium (i.e. a dummy variable for each

instrument multiplied by the spread for that instrument), and US rate i,t is an interaction

variable for each of the i instruments with the appropriately comparable U.S. treasury

rate. Since the quantity data follows a right-skewed distribution, a log transformation is

used to make this variable more closely follow a normal distribution. Consequently, the

regression coefficients, ρ1 and ρ2, can be interpreted as percent increases or decreases in

quantity rather than changes in levels.

The nominal yield on Israel Bonds is excluded from this reduced form regression

in order to avoid simultaneity bias. This bias is caused because the spread that the

Ministry of Finance sets is a function of the quantity demanded, while at the same time

the quantity demanded is a function of the spread set. As a result, including the nominal

yield causes correlation between the regressor variable and the error term. In the next

17
section, I will explain how I deal with this bias in order to properly identify the effect of

altruism on the demand curve alone. In this reduced form regression, however, the

coefficients, ρ1 and ρ2, represent only the effect on equilibrium quantities. In other words,

they are the effect on quantities after both demand and supply adjust accordingly.

The Israeli default risk premium and the U.S. treasury rate are included in the

regression as controls for the exogenous part of the spread. These rates are the important

benchmarks to which investors and the Israeli government compare the nominal yield of

the bonds when assessing the attractiveness of the investment. They represent a base

return required to compensate investors for the time value of money (the U.S. treasury

rate) and the additional return required to compensate investors for the possibility of an

Israeli default on the debt (the Israeli default risk premium). Notably, the default risk

premium is possibly correlated with the same events that cause shifts in altruism. For

instance, a terrorist attack may simultaneously increase the risk premium that investors

demand and increase sympathy for the state. Empirical research has shown mixed

support for this possibility. Blass, Peled, and Yafeh (2004) argue, for instance, that

Israel-specific events (like terrorism) have little impact on the risk premium relative to

international events from 1996-1999, but do impact the risk premium in 2000.

If the risk premium is also correlated with the quantity of bonds transacted,

omitting it may create a bias in the coefficients of altruistic events. Since the nominal

yields on these bonds change infrequently, changes in the risk premium between sales

periods (when the nominal yield is fixed) may be correlated with changes in the spread

that investors demand to hold the bonds. In fact, between periods, the only movement in

the spread that investors receive results from movement in the exogenous risk premium

18
and the U.S. treasury rate. Therefore, including the exogenous benchmark rates is

important in order to prevent omitted variable bias; however, the complexity of how they

enter into the model makes the coefficients estimated for their effect meaningless to

interpret.

Next, I will examine whether spreads move in relation to altruistic events7. A

second reduced form regression is run:

Regression 1.2

Yieldi,t = ε0 + ε1 * holiday t + ε2 * terrorism t

+ ε3 * US rate i,t + ε4 * Riskp i,t + ε5 * timevar t + ε6 * instrument i

where Yieldi,t is the nominal rate for instrument i in period t, instrument i is a dummy

variable for each of the 3 instrument types, holiday t is an indicator of religious holidays,

terrorism t is an indicator of terrorist attacks, Riskp i,t is an interaction variable for each of

the i instruments with the Israeli default risk premium, US rate i,t is an interaction variable

for each of the i instruments with the appropriately comparable U.S. treasury rate and

timevar t is a variable that allows for a time trend in the series. Since the spread is only

changed periodically, this regression will be run on the subset of observations that

includes only the times at which the interest rate setting decision is made (generally, this

is 5 days before a monthly sales period begins).

Demand Effects

Once it has been determined that bond sales increase or that bond spreads fall in

tandem with altruistic events, it is interesting to understand which portion of this

7
In this paper, I sometimes use the words “yield” and “spread” interchangeably. This is because a change
in the yield, when holding the U.S. rate and risk premium constant, is equivalent to a change in the spread.

19
variation is the result of the demand curve alone, as the primary motivation of this paper

is to understand unconventional investor motivations. In the model of the Israel Bonds

market presented above, altruism shocks affect the demand curve directly and affect the

supply curve through changes in the annual fundraising quota across years. Therefore,

within years, one expects the spread to fall in conjunction with altruistic events, but

across years, it is possible that a supply effect will offset this fall. Consequently, the net

effect on spreads is indeterminate. Yet, the fact that the spread likely adjusts somehow in

relation to altruistic events implies that the actual effect of altruism on quantity demanded

is different than the casual effect of altruism on equilibrium quantities estimated with

reduced form regression 1.1.

For instance, the model predicts a unit increase in altruism across periods will

result in a decrease in spreads within years. The resultant decrease in spreads, however,

means that there will be an offsetting decrease in demand. Therefore, quantities in

equilibrium within years may actually move less than the full demand shift would predict.

If the effect of exogenous spread movements on quantity demanded can be determined, it

is possible to solve for the other parameters that identify the demand function using

results from regressions 1.1 and 1.2.

In the model presented in chapter 3, quantity demanded is assumed to be a linear

function of spread and altruism, while the spread supplied is a linear function of the

inverse quantity and altruism (since it is allowed that the annual fundraising quota is

related to altruistic events like attacks). Consequently, it is necessary to identify the

following structural regression equations for supply and demand8:

8
In the same way that the right-skewed distribution of quantity is log-transformed to ensure that it follows
a more normal distribution, the right-skewed distribution of inverse quantity, which enters the supply
function, is log-transformed as well. Since ln(Q-1) = -ln(Q), I expect that the estimated coefficient β1 will
take the opposite sign that the parameter c has in the model from equation 1.2 in chapter 2. Consequently,

20
S: Yield = β0 + β1 lnQuantity + βa A + β3 US + β4 Risk + β5 X

D: lnQuantity = Φ0 + Φ1 Yield + Φa A + Φ3 US + Φ4 Risk + Φ5 X

where A represents an indicator of an altruistic event, US represents the appropriate U.S.

treasury rate, Risk represents the Israeli risk premium, and X represents exogenous

controls in the regressions. Combining these structural equations with regressions 1.1

and 1.2, it is possible to solve for the unobservable coefficient Φa (the effect of altruism

on demand alone) in terms of ρa (the coefficient on an indicator of altruism in regression

1.1: the causal effect of altruism on equilibrium quantities), εa (the coefficient on an

indicator of altruism in regression 1.2: the causal effect of altruism on equilibrium

spreads), ρ3, ε3, and Φ3 (the coefficients on the U.S. rate from regression 1.1, 1.2 and the

structural demand equation)9. It can be shown that10:

Equation 1.5

Φa = ρa - εa * [(ρ3 – Φ3)/ ε3]

In order to properly estimate Φ3, it is necessary to examine the lag structure of the

Israel Bonds market. The market works in the following way. For each sales period

(generally a month-long period), the Ministry of Finance sets the interest rate at which

each instrument of Israel Bonds will be sold for the duration of the period. Therefore, the

state sets one price for the entire period and allows orders to be filled as investors will

demand within that period. Since supply is fixed to be perfectly elastic within each

period, demand shifts can be recognized by changes in short-term quantity fluctuations.

the results can be interpreted to imply a 1 % increase in inverse quantity results in a -β1 change in the spread
supplied.
9
For a proof see Mathematical Appendix B.
10
As a preview to the reader, the value of εa appears not to be statistically different from zero in most
circumstances. If εa is assumed to be zero, the full demand shift, Φa, is close to ρa (the amount that
quantities move in equilibrium, estimated in regression 1.1). In other words, almost all of the movement of
quantities in equilibrium can be attributed to demand shifts.

21
 Notably, within each sales period, the spreads that investors receive change, even

though the nominal yields on the bonds do not. This is because the opportunity cost of

funds, or the bottom half of the spread, varies within periods. For instance, the yield on

Zero Coupon Israel Bonds may be a fixed 6% for a sales period, but within that period

U.S. treasuries and the Israeli risk premium change daily. As a result, the spread, which

is the difference between the bond yield and some combination of U.S. treasuries and the

Israeli risk premium, varies substantially. Since both yields from the U.S. treasury

market and the tradable Israeli debt market can reasonably be taken as exogenous, the

variation of these rates within a given period will trace out the price elasticity of demand.

Furthermore, by using this methodology, it is possible to estimate these elasticities over

longer periods of data than would otherwise be possible. Since changes in the spread

within sales periods are only determined by U.S. treasuries and the risk premium, it is not

necessary to have Israel Bond yield data for this calculation. Therefore, estimates can be

made incorporating data from several years before 2001 when the yield data begins,

improving the overall quality of the estimates.

To identify the price elasticity of demand, a fixed-effects regression, controlling

for each sales period and instrument type, will be run in the following form:

Regression 1.3

lnQi,t = Φ0 + Φ3 * US rate i,t + Φ4 * Riskp i,t

+ Φ5 * timevar t + Φ6 * instrument i + Φ7 * dow t + Φ8 * period j

where lnQi,t is the log-transformed sales for instrument i in period t, instrument i is a

dummy variable for each of the i instrument types, US rate i,t is an interaction variable for

each of the i instruments with the comparable U.S. treasury rate, Riskp i,t is an interaction

22
variable for each of the i instruments with the Israeli default risk premium, period j

represents a dummy variable for each of the j sales periods, dow t is a dummy variable for

each day of the week, and timevar is a time variable that allows for a time trend in the

series. Since many of the indicators of altruistic events used in this paper change slowly

relative to the length of a sales period, they are not used in this regression11.

Including dummy variables for the sales periods in the regression allows analysis

of changes of spreads within periods, when their movement is exogenously determined.

Since changes in the spread are exogenous when controlling for the sales period, Φ3 can

be interpreted as the effect of a change in U.S. interest rates on the quantity demanded,

holding all other variables constant, including the yield. Specifically, Φ3 is the price

elasticity of demand— the percent change in quantity associated with a unit change in the

treasury rate, all else equal.

11
The point of this exercise is precisely to identify the coefficient Φa, the effect of altruistic events on the
quantity demanded. It is my belief that altruism works over long time horizons. Consequently, it will not
be possible to observe the true value of Φa by including it in regression 1.3, which only looks within sales
periods (time horizons in the range of one month). Since altruistic events are not correlated with the U.S.
treasury rates, omitting them should not bias the regression estimates.

23
V. Data

Israel Bond Instruments

For the purposes of this paper, a unique and confidential dataset has been

constructed with information provided by the Israeli Ministry of Finance on the prices

and sales of the “Israel Bonds.” Data is provided on the yields and quantities at which

several Israel Bond instruments were sold over the 1990-2004 period. The dataset

contains monthly yield information on the Infrastructure and Absorption Issues (Zeros),

the Jubilee Issues Series A (5 years), the Jubilee Issues Series B (10 years), the Chai

Issues, several Canadian Issues and several variable rate (Libor-based) issues from 2001

to 2004. Furthermore, daily data on the quantity of bonds sold for three of these

instrument types (the Infrastructure and Absorption Issues and the two Jubilee Series) is

provided from 1990-2004.

For the purposes of this paper, I will focus entirely on the Infrastructure and

Absorption Issues and the two series of Jubilee Issues sold in the United States. The

limitations of the data provided make these bonds the easy choice, as they are the only

instruments for which daily quantity data is available. Furthermore, they are among the

most popular instruments with investors and therefore the most relevant to policy

considerations. In 2001, the combined dollar value of the Jubilee and Zero Coupon

bonds accounted for 57% of all Israel Bonds sold. This statistic rose to 76% in 2002 and

2003 and looks to be even higher in 2004 (78% as of November 2004).

Additionally, the terms of these particular instruments make them more likely to

be held by individual investors for whom one would expect the altruism effect to be the

greatest. For instance, the Jubilee A and B Series each offer fixed annual interest and the

24
Infrastructure and Absorption Issue is a zero-coupon discount bond. These interest

payment methods are simple and therefore more likely to be attractive to individual

investors than variable rate bonds with complex interest calculation methods. Also, these

instruments offer relatively small minimum subscription stipulations. The Zero Coupon

bonds are sold at a minimum face value of $6,000 and the Jubilee Bonds are sold with a

minimum subscription of $25,000 (although subsequent purchases can be as low as

$5,000). Other Israel Bond instruments tend to have higher minimum subscription

requirements. For instance, the 4th Variable Rate Libor notes come in minimum

subscriptions of $100,000 and the 3rd Libor Notes come in minimum subscriptions of

$150,000. While the Mazel Tov notes are also sold in much smaller denominations

(minimum subscriptions of $100), they serve primarily as gifts rather than investments

and only constitute a very small part of the Israeli debt. Appendix B provides additional

detail on the terms of these bonds from their prospectuses.

Finally, these three bond instruments offer the greatest chance of finding

systematic variation in the yield spreads. The yields set by the Ministry of Finance

generally change monthly for these instruments, whereas a few other instruments only

change quarterly. For instance, the Mazel Tov Bonds and the Chai Dollar Savings Bonds

only adjust their offered rates every six months. Furthermore, the Libor-tied notes tend to

be a fixed spread over Libor. Only very rarely is the offered spread above Libor changed.

For example, the 4th Variable Rate Libor notes have been a constant 60 basis points above

Libor for the past several years. While the nominal rates on these bonds vary, the fact

that they maintain a constant spread with Libor means that they do not fluctuate period to

period in conjunction with changes in altruism for Israel.

25
 Each instrument type has gone through several different “issues” over time. For

instance, the Infrastructure and Absorption Issue (Zero Coupon) was first issued in 1990.

Eventually, when the bonds from this subscription were sold, a second issue was released

in December 1991. As of December 2004, the Zero Coupon Bond is in its 8th Issue.

Similarly, the two Jubilee Series Bonds have each had 4 issues since their release in 1998

until the present day. When analyzing the sales of these instruments over long periods of

time, it is important to ensure that there are no important changes in the terms of their

prospectuses which could significantly alter their attractiveness to investors between

issues.

To ensure cross-comparability, a dataset was manually compiled by looking

through Securities and Exchange Commission filings made by the State of Israel. Copies

of all available prospectuses and registration supplements filed from 1993 until the

present were downloaded from the online Thomson Research database and read for their

essential features. While it was discovered that the essential terms of the bonds remained

constant across issues, the frequency at which Israel updated the nominal interest rates on

the bonds changed significantly. In the early 1990s, the interest rate that the bonds were

being sold at was only updated quarterly. Eventually, this policy changed and rates were

updated approximately every 45 days. More recently, the interest rates offered on the

bonds have become updated monthly. These “sales periods,” or periods within which the

supply of bonds is fixed, are necessary to understand in order to properly measure the

effect of altruism on demand alone. Therefore, dummy variables are included in the

dataset for each “sales period.” Table 1 shows the dates of changes from one sales period

convention to another.

26
 The raw dataset provided by DCI required some alteration to make it suitable for

analysis. Firstly, overlap between consecutive issues of the same instrument was

eliminated in order to make the data easier to work with. Obvious cases where sales for

an issue were recorded at a time when the issue was either not yet being sold or finished

being sold were deleted. Furthermore, when small periods of overlap were found

between one issue and the next, a time was selected to consider the end of the previous

issue and the start of the following one. This time was selected to match as best as

possible the start of a new sales period. In all but one case, such overlap was small and

inconsequential (i.e. only a few days), making it easiest to simply delete the improper

observations. This procedure makes the most sense because it is likely that sales before

the start and end date of the issue were either sales unavailable to the general public,

accounting corrections or coding errors. Therefore, including them in the dataset would

provide no useful information regarding how investors react to altruistic events. Overlap

between the 4th and 5th issues of the Zero Coupon bond, however, was substantial. For a

period of 4 months from January 1997 through April 1997 both issues were sold in

material quantities. Therefore, these sales were added together in the final dataset in

order to prevent underestimation of the true quantity of Zero Coupon bonds sold during

this period.

Furthermore, there were several missing observations in the data. One would

expect that a sales observation would be present for each instrument on every weekday

that the DCI office was open. Instead, there are many weekdays for which there are no

observations. There are three possibilities for why this could be the case. Firstly, it could

be that a missing observation means that sales for that day were zero. Secondly, a

27
missing observation could mean that DCI was closed that day for either a holiday or

some other reason. Thirdly, it is possible that the recording of new sales for the day was

simply pushed off until a later date. For instance, it is possible that when sales are low,

paperwork is only processed every other day rather than daily.

After consulting with the National Director of Operations at DCI, it seems most

likely that the missing observations are a mix of both office closings and days with zero

sales. The record keeping system used by DCI was changed in April 2001 when they

changed fiscal agents from Chase Manhattan Bank to the Bank of New York.

Consequently, old sales data was converted manually in order to be compatible with the

new system. DCI believes the data from these two periods to be comparable as a result of

this conversion. Interestingly, before 2001, missing observations are less common and

observations of “zero” sales are present. After 2001, missing observations are more

common and there are substantially fewer observations listed explicitly as “zero.”

Furthermore, variation within the data shows that there are several days with low enough

sales such that the presence of a day with no sales is plausible. As a result, I believe that

these missing observations are days with zero sales mixed with a small number of office

holidays.

Since an accurate list of historical office closings is not available, and it is

unlikely that the number of office holidays is large enough (or is sufficiently correlated

with altruistic events) to materially bias regression estimates, the following procedure

was used to handle missing observations. A comprehensive list of United States Treasury

yields was taken from Global Financial Data server. This list was then merged with the

Israel Bond sales data. In the case where both the U.S. Treasury data and the Israel

28
Bonds data had no observations for a given day, the day was dropped from the dataset

and considered an office closing. Since the U.S. Treasury data is comprehensive and

from a reliable source, I assume that these observations represent only official market

(and therefore also national) holidays. When either U.S. Treasury data was available or

one of the three Israel Bonds instruments had a sales observation but the others did not,

all missing observations for that day were considered to be “zero.” Similarly, a very

small number of negative sales, which likely represent accounting adjustments, were

considered “zero” observations if they were present on a weekday.

Finally, a number of weekend observations were found in the dataset. For these

observations, it is possible that they were properly meant to be included in the previous or

following business day. Feedback from DCI indicates that the sales report was

“balanced” by month, which means that the sum of the daily data was set to match their

official sales numbers from each month. In addition, these weekend observations can

sometimes be substantially larger-than-average observations, which may influence

regression estimates if improperly handled. Consequently, it is likely that these weekend

observations either represent a residual amount of sales for a week, the sum of sales

coded without dates for the week, or simply an error in the dataset. For these reasons, the

most sensible way to handle the weekend observations is to delete them.

The resulting dataset contains 7148 observations. Since all bonds are non-

negotiable, they are all new issues which mature at a fixed time from the issue date and

cannot be traded, except in special instances. Therefore, each yield and quantity data

point represents the price and amount at issuance of new bonds sold. Figures 2-4 display

some descriptive statistics of the data for each instrument type.

29
 The main shortcoming associated with this dataset is that the sales records do not

match perfectly with the time that the investment decision is made. Sales are only

recorded when receipt of payment is made to DCI. Since there is paperwork and an

application process to apply for these bonds, there is a lag between the time the investor

decides to buy the bonds and the time the sale is recorded. The Ministry of Finance

suspects that this lag can be anywhere from one day to 2 or more weeks depending on the

circumstances of the investor. To account for this, events will be looked at on a lagged

basis (i.e. number of attacks in the last month) and the evolution of quantity movements

after an event will be analyzed12.

Constructing Comparable Investment Variables

Variables are added to the datasets to serve as comparable investments. Ideally, a

non-altruistic security would be used that matches all of the important characteristics of

each Israel Bond instrument so that changes in the spread are only representative of how

much investors are willing to forgo to selflessly support the state (and a fixed illiquidity

premium to compensate for the transfer restrictions of the bonds). Unfortunately, there

exists no one security that matches the Israel Bonds perfectly in all respects. Instead, I

will control for both the U.S. treasury rate (the time value of money) and Israeli default

risk premium (the incremental rational return required to hold Israeli debt instead of U.S.

debt) separately.

Data on United States 5-year and 10-year treasuries are taken from the Global

Financial Data server. These rates, which are the ones that the Ministry of Finance

12
Evidence from the event studies conducted in chapter 6 suggests that this lag time is approximately 5-8
business days, or 1-2 weeks.

30
claims that it uses when setting the rates for the Israel Bonds, are useful because they will

match the Bonds both in terms of which currency the principal is paid in and in terms of

time to maturity.

Figure 5 shows the U.S. 10-year government bond yield along with the yields on

the Jubilee 10-year and Zero Coupon. Figure 6 shows the U.S. 5-year rate compared to

the Jubilee 5-year. From these figures, it is clear that the nominal yields on these bonds

closely track the comparable U.S. treasury benchmark.

Since the U.S. rates do not account for Israel-specific risk, it is important to

control for the default risk premium as well. Given the constraints of the available data,

it is only possible to control for a spread that will have close co-movement with the actual

risk premium. Since 1-year constant maturity Israeli debt yields are available from the

Thomson DataStream data service, it is possible to calculate the spread between 1-year

tradable Israeli debt and 1-year U.S. treasuries. Since the Israeli debt is denominated in

New Israeli Shequelim (NIS), however, this spread is an imperfect approximation of the

true default risk premium. The calculated risk premium includes expected inflation and

an inflation risk premium in addition to the default and liquidity risks. While liquidity

risk for government debt should be small, expected inflation and the inflation risk

premium likely account for a significant portion of this spread. It would be possible to

eliminate the inflation-related aspects of this spread by converting the currency on the

Israeli bond into U.S. dollars using forward currency rate data. Unfortunately, while

forward currency rates are available at the 1-year horizon from Bloomberg, the frequency

of the observations is too sporadic to be meaningfully employed as a correction in the

spread. Therefore, it will be impossible to eliminate expected inflation and inflation risk

31
from this spread. Fortunately, since there is unlikely to be a strong correlation between

altruistic events and inflation, this spread should be an unbiased approximation of the

Israeli default risk premium.

Additionally, it is potentially flawed to use the default risk at the 1-year horizon to

approximate the default risk at the 5-year and 10-year horizons. Theoretically, it is

possible that the default risk premium varies differently at various time horizons.

Therefore, in using this spread I am making the assumption that the Israeli risk premium

is relatively constant across time horizons; however, even if it does vary across horizons,

it should not bias the regression estimates so long as it does not vary systematically with

altruistic events.

Furthermore, because the bonds used as comparable investments have differences

in interest payment conventions and coupon amounts with the Israel Bonds, there will be

slight mismatching in terms of duration. This additional error, however, is only of

second-order importance relative to the correct matching of maturities. Since the largest

cash flow from these securities comes at maturity with the repayment of principal, a close

matching of maturities is significantly more important when calculating the spread.

Constructing Altruism Indicators and Event Variables

Variables are constructed for altruistic events using a historical timeline of

relevant terrorist attacks from the Israeli Ministry of Foreign Affairs website entitled,

“Suicide and Other Bombing Attacks in Israel Since the Declaration of Principles (Sept

1993).”13 This timeline of events is considered exhaustive and is used to represent the

universe of all possible Israeli terrorist attacks in this period. A total of 121 terrorist
13
http://www.mfa.gov.il/

32
attacks are identified from 1993-2004. Each is coded according to date, number of

attacks, number killed, and number wounded, as provided by the timeline14. The number

of Israelis killed or wounded serves as an objective proxy for categorizing the salience of

individual events. The death of the suicide bomber in a terrorist attack is not included in

these tallies because it is unlikely that pro-Israeli altruistic investors consider this a

relevant factor in their perceptions of salience. Tables 2a and 2b provide descriptive

statistics of these variables.

All news events documented on weekends or holidays are moved to the following

business day. This correction is made to ensure that the first day of an event, in event-

time, is the same as the first day an investor can act on the news information (i.e. the day

of the attack). Since Jerusalem is 7 to 10 hours ahead of the United States, in most cases,

investors in the United States will have already incorporated all information from an

event in Israel by the start of that same business day in the United States. In the event

that multiple attacks are coded on the same day, the statistics for both dead and wounded

are added together.

To discern the pattern of sales following an event, dummy variables are created

for consecutive periods of fixed length after an event. For instance, a variable is

constructed that has value of 1 for the first day after an attack and 0 otherwise. Similar

variables are created for the second day, third day, and so on for 75 days following a

terrorist attack. Using these variables will help identify the abnormal sales for each day

following an event. Furthermore, several index variables are created from these events to

14
Where information on the number of killed or wounded is not available from the MFA website, the
dataset is supplemented with information from the Jewish Virtual Library.
Source: http://www.jewishvirtuallibrary.org/jsource/Terrorism/TerrorAttacks.html

33
mimic changes in altruistic sentiment. For example, variables are created for the

frequency of attacks in the last 2 weeks, 1 month and 2 months.

Lastly, religious holidays are coded in a similar manner. Due to the large number

of Jewish holidays, the most important holidays are selectively chosen to be examined.

Allowing for too many religious events to be included in the regression simultaneously

will likely over fit the data. Holidays are selected according to their prominence for

American Jews and their religious/symbolic significance. The holidays analyzed include:

Rosh Hashana (Jewish New Year), Yom Kippur (Day of Atonement/Holiest Day of the

Year), Yom HaShoah (Holocaust Memorial Day), and Yom HaAtzma’ut (Israeli

Independence Day). Since Jewish holidays are fully-anticipatable events unlike terrorist

attacks or political developments, I expect that spread changes will be more obvious for

these events than for terrorist attacks. Table 2c contains a calendar of these holidays

from 2000-2005.

Since holidays are cyclical events, it will require caution when interpreting their

effect on sales. Sales in the Israel Bonds market are bound to be very cyclically driven

throughout the year. Much of the variation in sales will be tied to roll-overs of maturing

issues. Furthermore, some institutions may regularly purchase bonds at a particular time

of the year (for instance, at the start of a quarter or a half-year period). Since there will

be little to no variation in the date of a particular holiday (i.e. Rosh Hashanah generally

occurs in September), it will be hard to separate the effect of a particular holiday from

another seasonal or cyclical effect. Additionally, since holidays occur in relatively fixed

intervals, it will be necessary to analyze holidays as groups. For instance, when

analyzing sales after Rosh Hashanah and Yom Kippur, it will be essential to look at sales

34
patterns from the start of Rosh Hashanah until long after Yom Kippur. The fact that Yom

Kippur regularly occurs 8 days after Rosh Hashanah makes it impossible to consider its

effects separately. Similarly, Yom HaShoah is shortly followed by Yom HaAtzma’ut and

Yom HaZikaron (Israeli Memorial Day), which makes it difficult to identify their effects

separately as well.

35
VI. Evidence

The evidence suggests that quantities in equilibrium increase substantially when

attacks are more frequent. Furthermore, there appears to be a significant period

following individual attacks and important holidays with higher than average sales. On

the other hand, there is little statistical evidence that equilibrium spreads move relative to

altruistic events. While there is some evidence that spreads rise when the Israel risk

premium rises to compensate investors for the additional risk, it is found that investors

themselves seem to ignore Israel-specific risk. In fact, they purchase additional bonds

when the default risk premium is higher.

Equilibrium Quantity Results

Table 3 provides details of the regression estimates for equilibrium quantities for

all three instruments and Table 4 provides estimates broken down by instrument type.

Regression estimates are shown for altruistic events measured on the 2 week, 1

month and 2 month time horizons for log-quantity, quantity and a transformed log-

quantity15. I estimate an increase of 6.6% in sales for each additional attack in the last

two weeks, an increase of 6.1% for each additional attack in the last month and an

increase of 4.5% for each additional attack in the last two months. All estimates are

statistically significant at the 1% level, except on the 2 week horizon which is significant

at the 5% level16. While all 3 instruments show sales movements in relation to terrorist

15
While regression results using log-quantity are believed to be the most reliable, specifications using
quantity and a transformed log-quantity are shown to illustrate the effect of how missing observations were
treated on the results. The variable lnQplus is equal to ln(2745+Q) so that observations with Q=0 do not
have to be dropped from the ln(Q) regression. The number 2745 was selected because it is the smallest
non-zero quantity observation in the dataset.
16
Since there appears to be serial correlation in the data, Newey-West standard errors are used to correct
for arbitrary heteroskedasticity and serial correlation of 7 lags. Significance is reported throughout the
paper using 7 lags for daily quantity data and 40 lags (approx. 2 months) for less frequent yield data.

36
attacks, the Jubilee 10-year appears to move the most with a 16.5% increase in sales per

additional attack in the last 2 week period.

Figure 7 graphs the frequency of attacks over time with average daily sales of the

Zero Coupon bond. As the first Palestinian intifada, or uprising, waned around 1991,

both low attacks and sales are observed. Following the Declaration of Principles in

September 1993 (also known as the Oslo Accords— a significant step in the peace

process), attacks briefly rise, as do sales. A period of relative calm and low sales

followed until the start of the most recent intifada (the “al-Aksa Intifada”) in September

2000. This new intifada ushered in a new wave of violence, and interestingly, also

significantly increased bond sales.

With respect to Rosh Hashana, daily sales are higher on average by 23.5% over

the 1 month period following the holiday and by 29.7% over the 2 month period

following the holiday. These increases are driven strongly by sales of the Zero Coupon

bond, which has 41.1% higher sales in the month long period following the holiday and

56.5% higher sales in the 2 month period following the holiday. Since DCI organizes

extensive marketing of the Israel Bonds to Jews attending religious services on Rosh

Hashanah and Yom Kippur, this result is not surprising. The Zero Coupon bonds are

most attractive to these small investors because they require the smallest minimum

purchase and pay interest using the simplest convention. Consequently, one would

expect that the religiously-motivated sentiment created by these bond drives for small

investors would show up in greater sales of the instruments most attractive to this

investor class.

Different lag specifications were tested and it was found that significance was robust to these changes.

37
 Regressions 7 and 8 from Table 3 show statistically significant results, which are

opposite those one would expect to find for Rosh Hashanah but consistent with what one

would expect to find for terrorist attacks. In these regressions, a variable lnQplus is used

to represent quantity. This variable represents a transformed log-quantity equal to

ln(2745+Q) so that observations with Q=0 do not have to be dropped from the regression.

Replacing zero values with relatively small numbers, however, can falsely create huge

effects when using logs. Since there is significant uncertainty about the correctness of

the observations with zero values in the first place (see discussion in “data” section),

these results cannot be trusted without scrutiny. The observations with zero values were

determined by comparing U.S. treasury market data with Israel Bond sales--- if there was

U.S. market data but no Israel Bond observation, it was assumed that the day had zero

sales. It is possible, however, that several holidays that were observed in the Israel Bond

office were not observed by the U.S. market. Specifically, it is likely that the Israel Bond

office was closed for several days during the Rosh Hashanah and Yom Kippur period.

Since these observations were listed as zero rather than dropped (as an office closing

should be), using this specification with logs can negatively bias the coefficient estimate

dramatically. The fact that the coefficient for terrorist attacks seems to match the results

from the other regression specifications, supports this theory because attacks should not

systematically occur near days with different holiday conventions.

The evolution of sales in event time is shown for terrorist attacks, Rosh Hashanah

and Yom HaShoah in Figures 8-16. These figures graph the cumulative abnormal

percent increase (or decrease) for each day following an event. In other words, a straight

line in these figures represents a period of relatively constant above average sales (in the

38
amount of the slope of the line, per day). All patterns are found to be statistically

significant, unless otherwise noted. Chi-squared statistics are listed in the appendix with

the corresponding figures17.

Figure 8 provides the pattern of sales for all 3 instruments together for Rosh

Hashana. The findings are consistent with what one would expect. Following Rosh

Hashanah, there is a period of 5 to 8 business days with below-average to normal sales

followed by a steep increase in sales thereafter. During this 5 to 8 business day period,

Yom Kippur occurs and the High Holy Days end. Following the end of the High Holy

Days, bond sales come in daily at 52% higher than average amounts until day 3118. From

days 31 to 65, sales slow to 35% above average, until sales return to normal from day 66

to 7519.

Figures 9 and 10 show the pattern of sales following Rosh Hashana for the Jubilee

10-Year and Jubilee 5-Year, respectively. Both instruments follow a similar pattern

indicative of a small surge in sales shortly following the holiday. Both instruments

exhibit average or below-average sales for 5-9 days following Rosh Hashana. After that,

there is a brief period of approximately 7 days with above average sales, followed by a

prolonged period of average sales (as indicated by a “flat” line in the graph) for about 35

days. This inactivity is followed by another brief surge and then again average sales20.

17
To determine significance of the cumulative abnormal sales, a X2 test was run on the dummy variables for
each day following an attack of a particular salience. The test determined whether the sum of each of the
75 coefficients (one for each day after an event) was statistically significant. Newey West standard errors
were used to control for arbitrary hetereoskedacity and serial correlation of up to 7 lags.
18
This amount is estimated using the slope of the line from day 9 (13.7%) to day 31 (1159.3%) in Figure 8.
19
This amount is estimated using the slope of the line from day 32 (1119.5%) to day 65 (2265.8%) in
Figure 8.
20
This second surge in sales is likely to be attributable to seasonality in bond sales. Since bond sales can be
cyclically-driven, it is difficult to separate the effect of a holiday (which also occurs around the same time
every year) from seasonality.

39
The pattern of cumulative abnormal sales for these two instruments is only statistically

significant at the 15% level.

Figure 11 shows a much more prominent effect following Rosh Hashana for the

Zero Coupon bond. For the Zero Coupon, bond sales are average until 11 days following

the holiday. At that point, sales come in daily at 65% above average for the next 60 days,

until they gradually return to normal21. This pattern is found to be statistically significant

at the 1% level. This evidence supports my earlier finding that the Zero Coupon bond is

the primary instrument affected by the High Holy Days season because of its

attractiveness to small investors and its use in religious bond drives.

Figure 12 shows the evolution of sales following a terrorist attack for all three

instruments together. The pattern supports the claim that following a terrorist attack there

is a period of elevated bond sales. For instance, Figure 12 shows a period of

approximately 8 days following an attack with average sales. This period is observed

because of the lag associated with the purchase of these bonds. Immediately following

this period, there is a period of approximately 34 days with consistent above-average

sales of 7.9% per day22. Sales then return to normal levels from day 44 to 75, with a brief

“bump” from days 60-75. This pattern is mimicked in Figures 13, 14 and 15 for the

Jubilee 10-year, Jubilee 5-year and Zero Coupon bonds, respectively. Notably, the

Jubilee 10-year bond reacts the most predictably to terrorist attacks. These bonds

immediately increase in sales following an attack and remain at elevated levels until

approximately 40 days after the attack when they return to normal levels. These figures

also seem to suggest that the Zero Coupon bondholders react slower to news of an attack
21
This amount is estimated using the slope of the line from day 10 (49.0%) to day 65 (3620.6%) in Figure
11.
22
This amount is estimated using the slope of the line from day 9 (-20.6%) to day 43 (248.3%) in Figure
12.

40
then Jubilee bondholders. Figure 15 suggests that it takes approximately 30 days after an

attack before observing above-average sales for these investors. It is possible that these

smaller investors either take a longer time to complete the bond purchase paperwork or

incorporate new information slower than larger investors.

Figure 16 provides the pattern of abnormal sales following Yom HaShoah. The

pattern for Yom HaShoah is much more difficult to explain than the patterns for terrorist

attacks and Rosh Hashana. Yom HaShoah is a much less prominent event than Rosh

Hashana. Furthermore, Yom HaShoah occurs close by to several other important cyclical

events. Passover, Yom HaZikaron and Yom HaAtzma’ut all occur within a short period.

In addition, the chi-squared statistic indicates that the cumulative abnormal sales 75 days

from the event is statistically insignificant. The pattern appears to become positive

approximately one month after Yom HaShaoh, which coincides with the month of June,

the cyclical half-point of the year, and then falls sharply again. Therefore, given the

pattern of the variation it seems likely that this event can better be attributed to cyclical

forces (such as bond renewals or other purchases) associated with the 6 month mark in

the year.

Event Salience

Events are further broken down to identify their effect by salience. Terrorist

attacks are divided into a low salience and high salience group according to the number

of people wounded in each attack. Each salience group contains one half of the total

attacks so that the high salience group contains all attacks with over 29 people wounded

and the low salience group contains all attacks with 0 to 28 people wounded.

41
 The pattern of sales following these events shows that high salience terrorist

attacks increase sales more than low salience events while controlling for the High Holy

Days season. Figure 17 shows the evolution of abnormal sales in event time for the 75

business day period following an attack. After 75 days, the high salience events produce

an average increase in sales of 5.5% per day, while the low salience events produce an

average increase of only 1.9% per day. Cumulative abnormal sales for the low salience

group are found to be statistically insignificant (X2=0.81; P =0.3690), while cumulative

abnormal sales for the high salience group are statistically significant at the 1% level

(X2=9.62; P =0.0019).

Additionally, the 11 most salient attacks in terms of number of persons wounded

are identified and examined for their effect. Figure 18 shows the pattern of sales

following these 11 large attacks. Figures 19, 20 and 21 show the pattern of sales after the

attacks for the Jubilee 10-year, Jubilee 5-year and Zero Coupon individually. I find a

consistent pattern of greatly above-average sales following these events. For all three

instruments together, I estimate above-average sales of 23.6% per day over the entire 75

day period tested23. In addition, I estimate above-average sales of 31.3% per day for the

Jubilee 10-year, 24.3% per day for the Jubilee 5-year and 14.9% per day for the Zero

Coupon over the course of the same 75 day period24. The pronounced nature of these

nearly monotonically increasing patterns, along with the steep slopes (indicating

relatively high abnormal sales) suggests that salience is an important factor motivating

bond sales. In fact, I previously found that the average terrorist attack only produces 34
23
This amount is estimated using the slope of the line from day 1 (-43.9%) to day 75 (1707.0%) in Figure
18.
24
This amount is estimated for the Jubilee 10-year from the slope of the line from day 1 (8.8%) to day 75
(2323.1%) in Figure 19; for the Jubilee 5-year from the slope of the line from day 1 (70.9%) to day 75
(1728.9%) in Figure 20; and for the Zero Coupon from the slope of the line from day 1 (62.8%) to day 75
(1043.2%) in Figure 21.

42
days of above average sales with an increase of 7.9% per day. Consequently, it appears

that more salient attacks (as defined by the number of persons wounded) increase sales by

much larger amounts and for much longer periods of time.

Equilibrium Yield Changes

Interestingly, while quantities do move statistically relative to holidays and

terrorist attacks, yields generally do not. Table 5 shows the regression results for all

instruments together looking at events on the 1 month and 2 month horizon. There is no

statistically significant evidence that altruistic events cause yields to move, holding the

U.S. rate and risk premium constant25. The only event variable that moves spreads

statistically significantly is Yom HaShoah. As discussed in the previous section,

however, it appears this variable likely captures the cyclical effect of the half-year.

Consequently, it is not surprising that spreads move concurrently.

Table 6 lists the same results broken down by instrument type. Similarly, few

events are statistically significant aside from Yom HaShoah. Notably, however, there is

statistically significant evidence that spreads move relative to terrorist attacks for the

Jubilee 10-year bonds. In fact, I estimate that spreads increase by 0.019 for every

additional terrorist attack in the past month and that spreads increase by 0.014 for every

additional terrorist attack in the past 2 months for this instrument type. The fact that

there is some statistical evidence that spreads increase when attacks are more frequent

suggests that there may also be a supply effect. If the number of terrorist attacks only

entered into the demand function (through altruism), one would only expect to see yields

25
As noted earlier, yield data is only available from 2001-2004. Since yields only change monthly in this
period, the number of observations available is small. As a result, it will be difficult to be statistically
conclusive about changes in yields.

43
fall when attacks are greater. In the next section, I will show that even though spreads

may increase with greater attacks, they do not move enough to fully account for all of the

variation I find in quantities.

Yields in equilibrium are explained very well by movements in the U.S. treasury

rate and the Israeli risk premium. Depending on the instrument, 95% - 98% of the

variation in yields can be explained by these variables. If yields could be explained

perfectly by the U.S. rate and risk premium, it would imply that the Ministry of Finance

sets yields exogenously as a constant spread over these rates. While this is obviously not

the case here, the fact that yields are explained very well by these rates means that this is

close to what happens.

Notably, yields in equilibrium move very strongly with the U.S. treasury rates, but

less so with the Israeli risk premium. Yields for the Jubilee 5-year increase by 0.70 for

every percentage point increase in the comparable U.S. treasury rate, while the Jubilee

10-year yield increases by 0.73 and the Zero Coupon yield increases by 0.68. Figures 5

and 6 show the close co-movement of these rates. Furthermore, the yield increases by

0.03 per percentage point of risk premium for the Zero Coupon and Jubilee 10-year, but

varies statistically insignificantly for the Jubilee 5-year. These findings suggest two

interesting results. Firstly, investors care more about the nominal yield on the bond than

the yield relative to alternative investments. Secondly, investors discount the importance

of the risk premium relative to U.S. treasuries. Assuming that the Ministry of Finance

demands the “rational” spread, supply can be denoted linearly as:

Yield – U.S. Rate – Risk Premium = a + b * Qs

44
If investors demand a spread that weights the U.S. rate and risk premium separately (by

factors of γ and τ), demand can be denoted:

Qd = c + d * [Yield – γ * (U.S. Rate + τ * Risk Premium)]

In equilibrium, one would expect that:

dYield/dUS = (1-bdγ) / (1-bd)

dYield/dRisk = (1-bdγτ) / (1-bd)

Therefore, the finding that dYield/dUS < 1 implies that γ < 1. In other words, investors

discount the opportunity cost component of the spread relative to the nominal rate.

Similarly, finding that dYield/dUS > dYield/dRisk implies that τ < 1, or that investors

discount the component of the return they demand from the risk premium relative to U.S.

treasuries. If investors weighted the components of the spread in the same way that the

Bank did, we would observe γ = τ = 1 and the nominal yield would move 1 to 1 with the

risk premium and U.S. treasury rate in equilibrium. Additionally, it makes intuitive sense

that the instrument held most by the smallest investors, the Zero Coupon bond, is the one

that puts the most undue emphasis on the nominal yield (i.e. has the lowest estimate of

the movement of yields relative to U.S. treasuries).

While the measure used for the risk premium here is imperfect (i.e. is at the 1-

year horizon and includes expected inflation and an inflation risk premium), it seems

reasonable to assume the inflation is random noise (which should not bias the coefficient

estimate). Furthermore, if anything, using a risk premium on the 1-year horizon should

underestimate the risk premium investors would demand at the 5 or 10-year horizon. The

reason for this is that the chances of defaulting over a longer period should be higher than

the chances of defaulting over a short period. Consequently, one would expect a greater

45
than 1 to 1 movement with a 1-year risk premium in this specification. This interesting

result implies that investors in the Israeli Bond market either mistakenly ignore the risk

premium (perhaps as a vehicle for “giving” to the state in the form of lower than market

returns) or have fundamentally differing (either rationally or irrationally) perceptions of

the default risk than those in the tradable debt market.

Notably, however, these results are based on the assumption that the market can

be modeled by supply and demand functions and that the Ministry of Finance cares about

the “correct” spread (i.e. the U.S. rate and risk premium both enter into the spread 1 for 1

with the yield). Since the Ministry of Finance is a highly-sophisticated market participant

with good information concerning other credit sources, it is reasonable to assume that it

cares about the right spread; however, it is unclear whether the Ministry fully uses all of

the information at its disposal to its advantage. Given that there is little evidence that

spreads vary much with altruistic events, which raise the quantity of bonds transacted in

equilibrium, it is possible that the Ministry does not actually set spreads in the way I

assume. By varying interest rates opportunistically to capture a greater portion of the

surplus of the market when demand shifts occur, the Ministry may anger investors and

squander the goodwill that produces altruism in the first place. Furthermore, by varying

rates substantially, these bonds may get the reputation of being a bad deal for investors.

Instead of moving rates to match changes in demand, the evidence suggests that the

Ministry likely takes a subtler approach. If investors care disproportionately about

nominal rates and discount the risk premium, the Ministry can raise debt at lower-than-

market rates by changing the nominal yield slowly with respect to treasuries and by

compensating investors for only a small portion of the risk premium, if any. In this way,

46
the Ministry accrues the benefits of raising cheap debt without causing obvious price

movements which may signal that the bond prices are far away from their fundamental

values.

Demand-Only Effects

Regression estimates for the elasticity of demand with respect to the U.S. treasury

rate are given in Tables 7 and 8. These regressions are estimated by looking within sales

periods, when the nominal yields on the bonds are constant. I estimate a 55% increase in

sales per percentage point increase in the spread with 5-year treasuries for the Jubilee 5-

year, an 81% increase in sales per percentage point increase in the spread with 10-year

treasuries for the Jubilee 10-year and a 117% increase in sales per percentage point

increase in the spread with 10-year treasuries for the Zero Coupon bond. Intuitively, it

makes sense that the Zero Coupon would be the most sensitive to interest rates and that

the Jubilee 5-year would be the least sensitive. This is because bonds with longer

durations are the most sensitive to changes in interest rates. Of the 3 instruments

analyzed, the Zero Coupon bond should have the longest duration (since it pays no

interest until 10-years after issue, unlike the coupon-paying Jubilee series) and the Jubilee

5-year should have the shortest (since it matures in 5-years unlike the Jubilee 10-year and

Zero Coupon).

Regression estimates for the effect of risk-premium on quantity, however, are

counter-intuitive. I estimate a 41% increase in sales per percentage point increase in the

risk premium for the Jubilee 5-year, a 15% increase in sales for the Jubilee 10-year and a

47
13% increase in sales for the Zero Coupon. These results are statistically significant for

the Jubilee 5-year (1% level), but not for the Jubilee 10-year and Zero Coupon.

There are several possibilities for why this is observed. Firstly, it is possible that

the measure of risk premium used is inherently flawed (see discussion in “data” section).

It is possible that in a general equilibrium setting, higher inflation will cause investors in

Israeli government debt to substitute dollar-denominated bonds, like the Israel Bonds, for

shequel-denominated bonds. In this way, it is possible that when this imperfect measure

for risk premium is used, quantities will actually be higher when it is higher. This

explanation seems unlikely. The only investors who would do this as an inflation hedge

(and on such a short time interval that it would be found within a sales period) would be

sophisticated investors with short time horizons. These investors would likely find Israel

Bonds instruments unattractive because of the illiquidity associated with their transfer

restrictions. Furthermore, there are other liquid options available that hedge against

inflation. For instance, there are tradable CPI-liked Israeli government bonds as well as

tradable dollar-denominated Israeli bonds widely available. Consequently, it seems

unlikely that inflation is the cause of such a pronounced effect on quantities.

One interesting, but speculative, explanation is that the risk premium serves as a

proxy for a type of macro-level altruistic sentiment. The risk premium is high when

Israel is more likely to default. A greater likelihood of default implies a greater need for

assistance and therefore a greater likelihood of altruistic giving. While this possibility is

interesting, the likely explanation is that the occasional significance of this imperfect

proxy for risk premium is picking up some unknown alternative effect.

48
 Since it was shown in the previous section that yield variation can be explained

very well with movements in the U.S. treasury rate, it is possible that in practice, the

Ministry of Finance does not behave in the way I have modeled. Specifically, it seems

likely that the Ministry keeps interest rates at a relatively constant spread with the

appropriate U.S. treasury benchmark. If this is the case, the estimates provided for the

effect of terrorist attacks on equilibrium quantities can generally be attributed entirely to

demand shocks; however, since there is some evidence that spreads rise in the face of

altruistic events, it is important to examine whether this movement is sufficient to explain

all of the observed quantity fluctuation.

To this end, Table 9 provides estimates for the demand-only component of the

altruism shifts using the point estimates from the regressions and equation 1.5. Using

these point estimates, I find that occasional estimated increases in the yield cannot

account for the full fluctuation in the quantities of bonds sold. I estimate that an

additional attack in the last month increases the quantity demanded by 6.9% for the

Jubilee 5-year, 7.7% for the Jubilee 10-year and 1.9% for the Zero Coupon. Furthermore,

I estimate that the quantity demanded is higher in the 2 month period following Rosh

Hashana by 5.1% per day for the Jubilee 5-year, 14.0% per day for the Jubilee 10-year,

and 52.3% per day for the Zero Coupon. The fact that these point estimates are

consistently positive indicates that there must be some demand-only component

associated with altruistic events. Consequently, I find that investors do increase their

demand for bonds in periods with greater altruism.

49
VII. Conclusion

The market for Israel Bonds provides a unique opportunity to examine the

behavioral tendencies of small, altruistic investors in the absence of arbitrageurs. Any

theory concerning the Israel Bonds market must reconcile the following facts, as

presented in this paper. Firstly, quantities in equilibrium increase when attacks are more

frequent and during the High Holy Day religious season. Secondly, high salience attacks,

as defined by the number wounded in an attack, increase quantities more than low

salience attacks. Furthermore, there is little statistical evidence that yields in equilibrium

change relative to altruistic events. Yields do move, however, with the U.S. treasury rate,

but less than 1 to 1. Additionally, yields only move with respect to the Israeli default risk

premium for the Jubilee 10-year and Zero Coupon bond. In fact, demand for these bonds

actually increases when the Israeli default risk premium is greater, all else equal. Lastly,

point estimates for the shift in demand with respect to altruistic events indicate that even

though there is circumstantial evidence that spreads may increase with respect to these

altruistic events, this increase cannot account for the full effect observed in quantity

movements.

It is my belief that this evidence points to the fact that investors in the Israel Bond

market exhibit altruism (or non-private motivations) triggered by adverse developments

in Israel including terrorist attacks and other events which may cause the default risk

premium to rise. Furthermore, higher sales after the High Holy Days can imply either an

increase in “altruism” associated with religious sentiment and community awareness, or

an increase related to the cost-efficiency of marketing at a time when the target

population is heavily concentrated in known locations like synagogues.

50
 Since rates do not fully adjust in the way one would expect given these demand

shifts, it appears that the Ministry of Finance is “protecting” investors to a certain extent.

If prices were varied significantly period to period it may appear obvious to investors that

prices do not necessarily reflect the fundamental value of the securities. Consequently,

Israel Bonds may get the reputation of being a bad investment and the Ministry would

squander the altruism that it wants to harness in the form of a lower-than-market cost of

debt. The fact that the yields adjust to compensate investors for some portion of the risk

premium, even though they actually demand more bonds when the premium is higher,

supports this theory. Instead of varying rates period to period in conjunction with

changes in altruism or negatively with respect to the risk premium, it appears that the

Ministry of Finance is able to raise cheaper debt by varying nominal rates slowly with

respect to U.S. treasury benchmarks and not compensating investors fully (or at all) for

the default risk premium. While my analysis does not draw any conclusions about the

average level of price premium (or yield discount) received by the Ministry of Finance

over time, the fact that investors in this market are partly motivated by non-financial

considerations suggests that such a premium is likely. If this average level of premium is

high over time, the government stands to lose more by implementing a yield varying

policy and squandering investors’ valuable altruism.

Additional research is needed to determine whether Israel can further improve the

terms of its debt by varying rates more substantially in conjunction with these shifts in

demand. Furthermore, it is possible that Israel may be able to vary rates more frequently

in order to better trace demand shocks. As noted, however, this research will need to

consider the cost of potentially squandered altruism associated with such a policy.

51
 Given the success of the Israel Bonds program in encouraging investors to

purchase Israeli securities for non-financial reasons, it is possible that other countries

may also be able to use non-negotiable debt as a way to harness goodwill or altruism.

Further research is necessary into the nature of the altruistic relationship between

governments and investors in order to better assess which countries stand to benefit the

most from such schemes.

52
VIII. References

Ali P., and M. Gold (2002), ‘Analysing the Cost of Ethical Investments”, JASSA, pp. 9-
14

Blass, A., Peled, O., Yafeh, Y. (2004), ‘The Determinants of Israel’s Cost of Capital:
Globalization, Reforms and Politics.’, Israel Economic Review, Vol. 2, no. 1, pp. 29-54

Cullis, J.,Lewis, .A. and Winnett, A. ‘Paying to be good? UK ethical investments’,

Kyklos, 45, 3-24, 1992.

Diltz, J.D. (1995), ‘Does Social Screening Affect Portfolio Performance?”, The Journal
of Investing, Spring, pp. 64-69

Gregory, A., J. Matatko and R. Luther (1997), ‘Ethical Unit Trust Financial Performance:
Small Company Effects and Fund Size Effects’, Journal of Business Finance &
Accounting, Vol. 24, No. 5, 705-24

Guerard, J.B. (1997), ‘Is there a cost to being socially responsible in investing?’, The
Journal of Investing, Summer, pp. 11-18

Liviatan, O., (1980), ‘Israel’s External Debt’, Bank of Israel Economic Review, May,
No. 48-49, pp. 1-44.

Rechavi, Y., Weingarten A. (2004), ‘50th Anniversary for the Recruitment of External
Debt through the Israel Bonds Organization’, Bank of Israel Publications; Department of
Economic Activity in Foreign Currency; Assets and Liabilities Unit.

Rockoff, H. (2004), ‘Until it’s Over, Over There: The U.S. Economy in World War I’,
NBER Working Paper #10580

Sauer, D.A. (1997), ‘The Impact of Social-Responsibility Screens on Investment

Performance: Evidence from the Domini 400 Social Index and Domini Equity Mutual
Fund’, Review of Financial Economics, Vol. 6, No. 2, pp. 137-149

Statman, M. (2000), ‘Socially Responsible Mutual Funds’, Financial Analysts Journal,

May-June, pp. 30-39

Tippit, J. (2001), ‘Performance of Australia’s Ethical Funds’, The Australian Economic

Review, Vol. 34, no.2, pp. 170-178.

53
IX. Figures and Tables

Figure 1: Composition of the External Debt by Sources (September 2004)

Source: Israel Ministry of Finance

http://www.mof.gov.il/debt/ext/char.asp

Figure 2: Jubilee 10-Year Sales

Jubilee10-Year Sales
600000
Average Daily Sales

400000

200000

0
98

99

00

02

03
01

04
19

19

20

20

20

20

20

54
 19 19
9 98
19 0
9
19 1 19
9 99
19 2
9
19 3 20
9 00
19 4
9
19 5 20
9 01
19 6
9
19 7 20

ZeroCouponSales
Figure 4: Zero Coupon Sales
Jubilee5-Year Sales

9
Figure 3: Jubilee 5-Year Sales

02
19 8
9
20 9 20
0 03
20 0
0
20 1 20
0 04
20 2
0
20 3
04 0 50 10 15
00 00 00
00 00 00
0 0

0
Average Daily Sales

200000
400000
Average Daily Sales 600000

55
Figure 5: 10-Year Bond Yields

10 Year Bond Yields

8.00%
7.00%
6.00%
5.00% US10YR
Yield

4.00% Yield~ZeroCoupon
3.00% Yield~Jubilee10yr
2.00%
1.00%
0.00%
Jan-02
Jan-01

Jul-01

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04
Date

Figure 6: 5-Year Bond Yields

5-Year Bonds

7.00%
6.00%
5.00%
4.00% US5YR
Yield

3.00% Yield~Jubilee5yr
2.00%
1.00%
0.00%
Jan-04
Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jul-04

Date

56
Figure 7: Zero Coupon Bond Sales and Frequency of Terrorist Attacks

ZeroCouponSales andAttacks
Sales Attacks
Average Attacks in Last Month

4 600000

Average Daily Sales

500000
3

400000
2
300000

1 200000

0 100000
1990 1995 2000 2005
Year

Figure 7 graphs the frequency of attacks over time with average daily sales of the Zero Coupon bond. As
the first Palestinian intifada, or uprising, waned around 1991, both low attacks and sales are observed.
Following the Declaration of Principles in September 1993 (also known as the Oslo Accords— a
significant step in the peace process), attacks briefly rise, as do sales. A period of relative calm and low
sales followed until the start of the most recent intifada (the “al-Aksa Intifada”) in September 2000. This
intifada ushered in a new wave of violence for four years, and interestingly, also increased bond sales.
Similar patterns of sales are also found for the Jubilee Series.

57
Figure 8: Cumulative Abnormal Sales After Rosh Hashana: All Instruments

Cumulative % Increase in Sales

2500

2000
.

1500
Percent

1000

500

0
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65
-500

X2 = 27.69 (P = 0.0000)26
Days After Holiday

Following Rosh Hashanah, there is a period of 5 to 8 business days with below-average to normal sales
followed by a steep increase in sales thereafter. During this 5 to 8 business day period, Yom Kippur occurs
and the High Holy Days End. Furthermore, this period is partially the result of the lag time between the
holiday and completion of the bond purchasing process. Following the end of the High Holy Days, bond
sales come in daily at 52% higher than average amounts until day 31. From days 31 to 65, sales slow to
35% above average, until sales return to normal from day 66 to 75.

26
All X2 tests in this section test whether cumulative abnormal sales for the event studies are statistically
significant. They each test the null hypothesis that the terminal value in the series, the sum of the
cumulative abnormal sales after 75 days, is equal to zero. Low P-values indicate that we can reject this null
hypothesis. Significance is estimated using Newey West standard errors to correct for arbitrary
hetereoskedacity and serial correlation up to 7 lags.

58
Figure 9: Cumulative Abnormal Sales After Rosh Hashana: Jubilee 10-Year

Cumulative % Increase in Sales: Jubilee 10-Year

1400
.

1200
1000
800
Percent

600
400
200
0
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65

X2 = 2.51 (P = 0.1129)
Days After Holiday

Figure 10: Cumulative Abnormal Sales After Rosh Hashana: Jubilee 5-Year

Cumulative % Increase in Sales: Jubilee 5-Year

1400
.

1200
1000
800
600
Percent

400
200
0
-200 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65
-400

X2 = 2.59 (P = 0.1074)
Days After Holiday

59
Figure 11: Cumulative Abnormal Sales After Rosh Hashana: Zero Coupon

Cumulative % Increase in Sales: Zero Coupon

4000
.

3500
3000
2500
2000
Percent

1500
1000
500
0
-500 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65

X2 = 30.15 (P = 0.0000)
Days After Holiday

For the Zero Coupon, bond sales are normal until approximately 11 days following the holiday. At that
point, sales come in daily at 65% above average for the next 60 days, until they gradually return to normal.
This evidence supports the finding that the Zero Coupon bond is the primary instrument affected by the
High Holy Days season because of its attractiveness to small investors and its use in religious bond drives.

60
Figure 12: Cumulative Abnormal Sales After Terrorist Attack: All Instruments

Cumulative % Increase in Sales

400

350

300
.

250
Percent

200

150

100

50

0
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 6
-50
X2 = 34.54 (P = 0.0000) Days After Attack
Figure 12 shows above-average sales starting approximately 8 days after a terrorist attack and continuing
until approximately 41 days after the event, at which point sales return to normal, with a small “bump” in
the series at approximately 60 days.

61
Figure 13: Cumulative Abnormal Sales After Terrorist Attack: Jubilee 10-Year

Cumulative % Increase in Sales: Jubilee 10-Year

450
400
.

350
300
Percent

250
200
150
100
50
0
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65

X2 = 26.25 (P = 0.0000)
Days After Attack

Figure 14: Cumulative Abnormal Sales After Terrorist Attack: Jubilee 5-Year

Cumulative % Increase in Sales: Jubilee 5-Year

300
.

250
200
150
Percent

100
50
0
-50 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65

-100

X2 = 6.66 (P = 0.0099)
Days After Attacks

62
Figure 15: Cumulative Abnormal Sales After Terrorist Attack: Zero Coupon

Cumulative % Increase in Sales: Zero Coupon

400
350
.

300
250
200
Percent

150
100
50
0
-50 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65
-100
-150

X2 = 9.14 (P = 0.0025)
Days After Attacks

Figure 16: Cumulative Abnormal Sales After Yom HaShoah: All Instruments

Cumulative % Increase in Sales

500
.

400
300
200
Percent

100
0
-100 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65

-200
-300

X2 = 0.02 (P = 0.8802)
Days After Holiday

It seems likely that the pattern of sales following Yom HaShoah can be attributed to seasonal variation.

63
Figure 17: Cumulative Abnormal Sales by Salience Group: All Instruments

Cumulative % Increase in Sales

600
..

500
400
300
Percent

200
100
0
-100 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65
-200
Days After Attack

Low
Low Salience: X2=0.81 (P =0.3690); High Salience: X2=9.62 Salience
(P =0.0019) High Salience
The pattern of sales following these events shows that high salience terrorist attacks (defined as the half of
all attacks with the most persons wounded) increase sales more than low salience events while controlling
for the High Holy Days season. Figure 17 shows the evolution of abnormal sales in event time for the 75
business day period following an attack. After 75 days, the high salience events produce an average
increase in sales of 5.5% per day, while the low salience events produce a cumulative percent increase of
only 1.9% per day. Cumulative abnormal sales for the low salience group are found to be statistically
insignificant, while cumulative abnormal sales for the high salience group are statistically significant at the
1% level.

64
Figure 18: Cumulative Abnormal Sales for 11 Largest Attacks: All Instruments

Cumulative % Increase in Sales: 11 Largest Attacks

1800
1600
.

1400
1200
1000
800
Percent

600
400
200
0
-200 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61
X2 = 37.38 (P = 0.0000) Days After Attack
Figure 18 shows the strong effect of the most salient attacks on quantities. I estimate above-average sales
of 23.6% per day over the entire 75 day period following the largest attacks. Previously, I found that the
average terrorist attack only produces 34 days of above average sales of 7.9% per day27. Consequently, it
appears that more salient attacks increase sales by larger amounts and for longer periods of time.

27
This amount is estimated using the slope of the line from day 9 (-20.6%) to day 43 (248.3%) in Figure
12.

65
Figure 19: Cumulative Abnormal Sales for 11 Largest Attacks: Jubilee 10-Year

Cumulative % Increase in Sales: Jubilee 10-Year

2500
.

2000

1500
Percent

1000

500

0
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65

X2 = 29.03 (P = 0.0000)
Days After Attack

Figure 20: Cumulative Abnormal Sales for 11 Largest Attacks: Jubilee 5-Year

Cumulative % Increase: Jubilee 5-Year

2000

1800

1600
.

1400

1200

1000
Percent

800

600

400

200

0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67
-200
2
X = 12.91 (P = 0.0003)
Days After Attacks

66
Figure 21: Cumulative Abnormal Sales for 11 Largest Attacks: Zero Coupon

Cumulative % Increase in Sales: Zero Coupon

1200

1000
.

800

600
Percent

400

200

0
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65
-200

X2 = 4.69 (P = 0.0303) Days After Attack

67
Table 1: Sales Periods 1990-2004

Sales Periods 1990 – 2004

Dates Periods
1/90 - 7/96 Quarterly periods ending 1/31, 4/30, 7/31, 10/31
8/96 - 1/00 Periods beginning 8/1, 9/15, 11/1, 12/15, 2/1, 3/15, 5/1, 6/15
2/00 - 12/04 Monthly periods

Table 2a: Descriptive Statistics of Terrorist Attack Indicators

Descriptive Statistics of Altruism Indicators for Terrorist Attacks

Variable Description Obs Mean Std. Dev. Min Max
282
Number of Attacks in Last 2 Weeks 2 0.508 1.04 0 7
281
Number of Attacks in Last Month 2 1.004 1.68 0 11
279
Number of Attacks in Last 2 Months 2 2.007 2.89 0 17

Table 2b: Descriptive Statistics for Salience of Attacks

Descriptive Statistics of 121 Identified Attacks

Variable Obs Mean Std. Dev. Min Max
Killed 121 5.950 8.078 0 39
Wounded 121 41.603 44.253 0 220

Table 2c: The Jewish Holidays 2000-2005

2000 2001 2002 2003 2004 2005

Yom HaShoah May 2 Apr 20 Apr 9 Apr 29 Apr 18 May 6
Yom HaAtzma'ut May 10 Apr 26 Apr 17 May 7 Apr 27 May 12
Rosh Hashana Sep 30 - Oct 1 Sep 18-19 Sep 7-8 Sep 27-28 Sep 16-17 Oct 4-5
Yom Kippur Oct 9 Sep 27 Sep 16 Oct 6 Sep 25 Oct 13

68
Table 3: Regression Results for Equilibrium Quantity
1 2 3 4 5 6 7 8 9
Horizon 2 weeks 1 month 2 months 2 weeks 1 month 2 months 2 weeks 1 month 2 months
Variable lnQ lnQ lnQ Q Q Q lnQplus† lnQplus† lnQplus†
# of Attacks 0.0660 0.0609 0.0451 64595.4 47059.9 31286.4 0.0311 0.0462 0.0336
(2.43)** (3.89)*** (4.70)*** (1.28) (2.38)** (3.19)*** (0.88) (2.00)** (2.36)**
Rosh Hashana -0.0283 0.2351 0.2973 236854.1 108059.3 112355.7 -0.2773 -0.0475 0.1805
(0.27) (2.64)*** (3.93)*** (1.18) (1.00) (1.67)* (2.21)** 0.34 (1.78)*
Yom HaShoah -0.1778 -0.0257 0.1365 -134529.4 -18253.3 124487.9 -0.1331 -0.0206 0.0986
(1.51) (0.30) (1.87)* (2.11)** (0.26) (1.50) (0.84) (0.17) (1.13)
Time Trend 0.0011 0.0011 0.0010 365.6 349.4 323.0 0.0015 0.0015 0.0015
(10.26)*** (10.12)*** (10.60)*** (5.29)*** (5.24)*** (4.93)*** (11.44)*** (11.20)*** (11.01)***

Observations 5287 5287 5287 5989 5989 5989 5989 5989 5989
Adj. R-squared 0.1090 0.1136 0.1222 0.0343 0.0341 0.0356 0.1149 0.1153 0.1177

Absolute value of z statistics in parentheses.

* significant at the 10% level; ** significant at the 5% level; *** significant at the 1% level

Each regression also contains a constant term plus dummy variables for each instrument type, day of the week and
interaction terms for the risk premium and U.S. treasury rate with each instrument type.

Newey West standard errors are used and reported using a lag length of 7 days to correct for serial correlation.

† lnQplus is a transformed log quantity = ln(2745 + Quantity) such that observations with Quantity = 0 do not have to be dropped from the regression.

69
Table 4: Regression Results for Equilibrium Quantity by Instrument Type
10 11 12 13 14 15 16 17 18
Instrument Jubilee 5-Year Jubilee 10-Year Zero Coupon
Horizon 2 weeks 1 month 2 months 2 weeks 1 month 2 months 2 weeks 1 month 2 months
Variable lnQ lnQ lnQ lnQ lnQ lnQ lnQ lnQ lnQ
Attacks 0.0343 0.0586 0.0372 0.1649 0.1047 0.0709 0.0052 0.0241 0.0282
(0.67) (2.13)** (2.17)** (4.41)*** (4.21)*** (4.72)*** (0.11) (0.93) (1.76)*
Rosh Hashana -0.0880 0.0100 0.0475 0.0789 0.1844 0.1450 -0.0707 0.4111 0.5646
(0.39) (0.07) (0.38) (0.43) (1.29) (1.25) (0.44) (2.68)*** (4.51)***
Yom HaShoah -0.0820 0.0791 0.2228 -0.1063 -0.0541 0.0830 -0.2825 -0.0886 0.1026
(0.32) (0.45) (1.53) (0.50) (0.41) (0.67) (1.83)** (0.66) (0.93)
Time Trend 0.0012 0.0012 0.0012 0.0010 0.0010 0.0010 0.0011 0.0011 0.0010
(5.62)*** (5.54)*** (5.48)*** (6.20)*** (6.04)*** (5.75)*** (6.72)*** (6.66)*** (6.40)***
U.S. Rate 0.2184 0.2422 0.2434 0.2335 0.2500 0.2607 0.3575 0.3705 0.3837
(2.41)** (2.65)*** (2.66)*** (2.27)** (2.37)** (2.52)** (3.86)*** (4.04)*** (4.27)***
Risk Premium 0.0408 0.0495 0.0489 0.0882 0.0902 0.0909 0.1267 0.1253 0.1188
(1.12) (1.37) (1.33) (2.96)*** (2.95)*** (3.04)*** (4.84)*** (4.81)*** (4.65)***

Observations 1519 1519 1519 1384 1384 1384 2384 2384 2384
Adj. R-squared 0.0825 0.0875 0.0927 0.1355 0.1360 0.1438 0.0867 0.0929 0.1120
Absolute value of z statistics in parentheses.
* significant at the 10% level; ** significant at the 5% level; *** significant at the 1% level

Each regression also contains a constant term plus dummy variables for each instrument type and day of the week.
U.S Rate is the 10-year rate for the Jubilee 10-year and Zero Coupon and is the 5-year rate for the Jubilee 5-year.

Newey West standard errors are used and reported using a lag length of 7 days to correct for serial correlation.

70
Table 5: Regression Results for Equilibrium Spreads
19 20
Instrument All Instruments
Horizon 1 month 2 months
Variable Yield Yield
Number of Attacks 0.0037 0.0024
(0.49) (0.48)
Rosh Hashana 0.0170 0.0081
(0.46) (0.26)
YomHaShoah 0.1011 0.0637
(3.35)*** (2.19)**
Time Trend -0.0008 -0.0008
(8.83)*** (9.08)***
U.S. 5-year * Jubilee 5-year 0.7990 0.7924
(15.63)*** (15.98)***
U.S. 10-year * Jubilee 10-year 0.8513 0.8422
(15.68)*** (16.26)***
U.S. 10-year * Zero Coupon 0.8513 0.4701
(15.68)*** (7.88)***
Risk Premium * Jubilee 5-year 0.0007 -0.0013
(0.05) (0.09)
Risk Premium * Jubilee 10-year 0.0472 0.0454
(4.29)*** (4.09)***
Risk Premium * Zero Coupon -0.0034 -0.0052
(0.33) (0.48)

Observations 143 143

Adj. R-squared 0.9834 0.9832
Absolute value of z statistics in parentheses.
* significant at the 10% level; ** significant at the 5% level; *** significant at the 1% level

Each regression also contains a constant term and dummy variables for each instrument type.
U.S. rate and Risk Premium variables are interaction terms with dummy variables for the specified instrument type.

Newey West standard errors are used and reported using a lag length of 2 sales periods (40 business days) to correct for serial
correlation.

71
Table 6: Regression Results for Equilibrium Spreads by Instrument Type
21 22 23 24 25 26
Instrument Jubilee 5-Year Jubilee 10-Year Zero Coupon
Horizon 1 month 2 months 1 month 2 months 1 month 2 months
Variable Yield Yield Yield Yield Yield Yield
Number of Attacks -0.0096 -0.0065 0.0191 0.0144 0.0022 -0.0003
(0.82) (0.88) (1.99)** (2.13)** (0.23) (0.05)
Rosh Hashana 0.0183 -0.0029 0.0112 0.0038 0.0157 0.0180
(0.27) (0.05) (0.20) (0.07) (0.34) (0.45)
YomHaShoah 0.0907 0.1117 0.1129 0.0373 0.1025 0.0445
(1.32) (2.28)** (4.20)*** (1.35) (3.23)*** (1.37)
Time Trend -0.0010 -0.0011 -0.0010 -0.0010 -0.0004 -0.0004
(7.80)*** (8.90)*** (9.72)*** (9.43)*** (3.49)*** (3.54)***
U.S. Rate 0.7015 0.6786 0.7281 0.7262 0.6789 0.6817
(11.69)*** (13.76)*** (20.67)*** (17.02)*** (12.66)*** (13.36)***
Risk Premium -0.0223 -0.0277 0.0280 0.0271 0.0276 0.0275
(1.31) (1.64) (2.70)*** (2.52)** (2.60)*** (2.50)**

Observations 48 48 48 48 47 47
Adj. R-squared 0.9767 0.9776 0.9749 0.9750 0.9563 0.9535
Absolute value of z statistics in parentheses.
* significant at the 10% level; ** significant at the 5% level; *** significant at the 1% level

Each regression also contains a constant term.

U.S Rate is the 10-year rate for the Jubilee 10-year and Zero Coupon and is the 5-year rate for the Jubilee 5-year.

Newey West standard errors are used and reported using a lag length of 2 sales periods (40 business days) to correct for serial correlation.

72
73
Table 7: Regression Results for Demand Elasticity Estimation
27 28 29
Instrument
Table 8: Regression All Instruments
Results for Demand Elasticity Estimation by Instrument Type
Variable lnQ Q lnQplus†
30 31 32 33 34 35 36 37 38
Time Trend 0.0391 28530.5200 0.0445
Instrument Jubilee 5-Year Jubilee 10-Year Zero Coupon
(12.72)*** †
(8.45)*** (11.00)*** †
Variable
U.S. 5-year * Jubilee 5-year lnQ Q
-0.4634 lnQplus lnQ
-607671.5000 Q lnQplus
-0.6132 lnQ Q lnQplus†
Time Trend 0.0503 71305.0 (4.61)*** 0.0578 0.0336
(3.95)*** 25610.7 (4.34)*** 0.0363 0.0362 14616.2 0.0419
U.S. 10-year * Jubilee 10-year (8.02)*** (5.83)*** -0.8094 (6.88)*** (5.74)***
-695336.0000 (4.48)*** (4.77)***
-1.1090 (9.54)*** (8.70)*** (8.17)***
U.S. Rate -0.5474 -1569629.0(5.24)*** -0.9971 -0.8056
(3.42)*** -829208.6 (5.07)*** -1.2784 -1.1743 -399145.3 -0.9439
U.S. 10-year * Zero Coupon(2.22)** (2.46)** -0.7773 (3.10)*** -654754.9000
(3.07)*** (1.95)* -0.7549
(3.86)*** (5.27)*** (3.99)*** (2.76)***
Risk Premium 0.4080 355558.1 (5.09)*** 0.5278 (3.52)***
0.1536 89303.9 (3.46)*** 0.4749 0.1332 66759.5 0.2895
Risk Premium * Jubilee 5-year (3.81)*** (1.40) 0.2038 (3.25)*** 168314.4000
(1.58) (1.25) 0.3917
(3.63)*** (1.27) (1.25) (2.03)**
(3.00)*** (2.02)** (4.08)***
Risk Premium * Jubilee 10-year 0.2434 175275.5000 0.4271
Observations 1519 1723 1723 1384 1723 1723 2384 2543 2543
(3.54)*** (2.17)** (4.45)***
Adj. R-squared 0.3412 0.1099 0.3072 0.3301 0.1019 0.3429
Risk Premium * Zero Coupon 0.2226 162368.1000 0.4585 0.4292 0.2510 0.3094
Absolute value of z statistics in parentheses. (3.20)*** (2.03)** (4.83)***
* significant at the 10% level; ** significant at the 5% level; *** significant at the 1% level
Observations 5287 5989 5989
Adj.
EachR-squared 0.3483
regression also contains a constant term plus dummy variables for each day of the 0.0873
week and sales period. 0.2982
Absolute value of z statistics in parentheses.
* Newey
significant at the
West 10% level;
standard ** significant
errors at the
are used and 5% level;
reported *** significant
using a lag lengthat the
of 71%days
levelto correct for serial correlation.

Each regression also contains a constant term plus dummy variables for each instrument type, day of the week and sales period.
U.S Rate is the 10-year rate for the Jubilee 10-year and Zero Coupon and is the 5-year rate for the Jubilee 5-year.

U.S. rate and Risk Premium variables are interaction terms with dummy variables for the specified instrument type.
† lnQplus is a transformed log quantity = ln(2745 + Quantity) such that observations with Quantity = 0 do not have to be dropped from
the regression.
Newey West standard errors are used and reported using a lag length of 7 days to correct for serial correlation.

† lnQplus is a transformed log quantity = ln(2745 + Quantity) such that observations with Quantity = 0 do not have to be dropped from the regression.

74
75
 Table 9: Point Estimates of Demand Effects
Jubilee 5-Year Φ3 = -0.5474
Variable ρa εa ρ3 ε3 Φa
Attacks 1mo. 0.0586 -0.0096 0.2422 0.7015 0.0694
Attacks 2mo. 0.0372 -0.0065 0.2434 0.6786 0.0447
Rosh Hashana 1mo. 0.0100 0.0183 0.2422 0.7015 -0.0105
Rosh Hashana 2mo. 0.0475 -0.0029 0.2434 0.6786 0.0510

Jubilee 10-Year Φ3 = -0.8056

Variable ρa εa ρ3 ε3 Φa
Attacks 1mo. 0.1047 0.0191 0.2500 0.7281 0.0770
Attacks 2mo. 0.0709 0.0144 0.2607 0.7262 0.0498
Rosh Hashana 1mo. 0.1844 0.0112 0.2500 0.7281 0.1681
Rosh Hashana 2mo. 0.1450 0.0038 0.2607 0.7262 0.1395

Zero Coupon Φ3 = -1.1743

Variable ρa εa ρ3 ε3 Φa
Attacks 1mo. 0.0241 0.0022 0.3705 0.6789 0.0190
Attacks 2mo. 0.0282 -0.0003 0.3837 0.6817 0.0288
Rosh Hashana 1mo. 0.4111 0.0157 0.3705 0.6789 0.3752
Rosh Hashana 2mo. 0.5646 0.0180 0.3837 0.6817 0.5234

Φa is the shift in the demand curve associated with an altruistic event:

Φa = ρa - εa * [(ρ3 – Φ3)/ ε3] where ρa is the effect of the altruistic event on equilibrium quantities, ρ3 is
the effect of the U.S. rate on equilibrium quantities, εa is the effect of the event on equilibrium yields, ε3 is
the effect of the U.S. rate on equilibrium yields, and Φ3 is the effect of the U.S. rate on the quantity
demanded, while holding the nominal yield constant.

While it is not possible to determine the statistical significance of Φa because the covariance of the
parameters with each other is not known, my point estimates provide evidence consistent with the theory
that altruism (as indicated by terrorist attacks) increases investor demand for these bonds. Even if yields do
increase by the amounts estimated here (although the data are not always statistically conclusive that this is
the case), these findings suggest that a possible change in supply cannot account for the full variation
observed in equilibrium quantities. Consequently, these point estimates complement my other findings
from event studies that indicate investors purchase more bonds after Rosh Hashana and terrorist attacks.

76
Mathematical Appendix A

Using constrained maximization with a lagrangian multiplier, supply in period t is

denoted:

A.1 dQst/dst * st + Qst = λ * dQst/dst

dQst/dst = Qst / (λ – st)

(1 / Qst)* dQst = dst / (λ – st)

Integrating both sides:

ln |Qst| = ln |λ – st| + k

e^( ln |Qst| ) = e^( ln |λ – st| + k )

Qst = c * |1/ (st – λ)|, which since Qst > 0 implies c > 0.

dQst/dst = -c * |1 / (st – λ) / (st – λ) , which since dQst/dst < 0 and c > 0 implies (st – λ) > 0

Consequently supply can be denoted:

Qst = c / (st – λ)

st = λ + c * Qst-1

77
Mathematical Appendix B

Using equilibrium data, the following regressions are estimated:

Regression 1.1:

lnQi,t = ρ0 + ρ1 * holiday t + ρ2 * terrorism t+ ρ3 * US rate i,t

+ ρ4 * Riskp i,t + ρ5 * timevar t + ρ6 * instrument i + ρ7 * dow t

Regression 1.2:

Yieldi,t = ε0 + ε1 * holiday t + ε2 * terrorism t

+ ε3 * US rate i,t + ε4 * Riskp i,t + ε5 * timevar t + ε6 * instrument i

For simplicity here, these will be denoted:

C.1 Q = ρ0+ ρa A + ρ3 U + ρ4 R + ρ5 X

C.2 Y = ε0+ εa A + ε3 U + ε4 R + ε5 X

where A is an altruistic event (terrorist attack or holiday), U is the U.S. rate, R is the risk

premium and X are the other exogenous controls.

It is assumed in chapter 3 that the supply and demand functions can be approximated by:

S: Yield = β0 + β1 lnQuantity + βa A + β3 US + β4 Risk + β5 X

D: lnQuantity = Φ0 + Φ1 Yield + Φa A + Φ3 US + Φ4 Risk + Φ5 X

Which, for simplicity, will also be denoted:

S: Y = β0 + β1 Q + βa A + β3 U + β4 R + β5 X

D: Q = Φ0 + Φ1 Y + Φa A + Φ3 U + Φ4 R + Φ5 X

Equating supply and demand, the following two equilibrium conditions are found:

Y = β0 + β1 [Φ0 + Φ1 Y + Φa A + Φ3 U + Φ4 R + Φ5 X] + βa A + β3 U + β4 R + β5 X

78
C.3:

Y(1 - β1Φ1) = (β0 + β1Φ0) + (β1Φa+ βa)A + (β1Φ3+ β3)U +( β1Φ4+ β4)R + (β5+ β1Φ5)X

and

Q = Φ0 + Φ1 [β0 + β1 Q + βa A + β3 U + β4 R + β5 X ] + Φa A + Φ3 U + Φ4 R + Φ5 X

C.4:

Q(1- β1Φ1) = (Φ0 + Φ1β0) + (Φ1βa+ Φa)A + (Φ1β3+ Φ3)U + (Φ1β4+ Φ4)R + (Φ5+ Φ1β5)X

Since equation C.1 must equal C.3 and C.2 must equal C.4, it implies:

C.5 εa = (βa + β1Φa) / (1 - β1Φ1)

C.6 ρa = (Φ1βa + Φa) / (1 - β1Φ1)

C.7 ε3 = (β1Φ3+ β3) / (1 - β1Φ1)

C.8 ρ3 = (Φ1β3+ Φ3) / (1 - β1Φ1)

C.5-8 can be solved to show:

C.9 Φa = ρa - εaΦ1

C.10 Φ3 = ρ3 – ε3Φ1

which together define Φa as a function of known parameters:

C.11 Φa = ρa - εa * [(ρ3 – Φ3)/ ε3]

79
Appendix A: Israel Bonds Marketing Materials

The following 3 images come from both modern and vintage advertisements for

Israel Bonds. Noticeably, they focus heavily on the religious connection to the investor

and the development projects that the proceeds may finance, rather than the attractiveness

of the investment terms to the individual.

Source: Moshen-Media
www.moshenmedia.com

Source: E-bay Auction Listing

80
Source: E-bay Auction Listing.

81
Appendix B: Israel Bond Prospectus Features28

Jubilee Series
Maturity
Series A: Five years from the issue date.
Series B: Ten years from the issue date
Interest
Fixed annual interest rate set forth on a sticker affixed to the cover page of this
prospectus and specified on the book-entry statement or bond certificate.
Paid every May 1st and November 1st
Limitations
You may not assign or transfer the bonds except in certain special instances.
We will only repurchase bonds prior to maturity under limited circumstances.
Repurchases will generally be effected within sixty days' written notice of a repurchase
request.
Minimum Subscription
$25,000 (you may buy subsequent bonds in minimum denominations of $5,000)
Issue Date
First day of the month following the month in which the fiscal agent accepts the
subscription
No Certificate
We are issuing the bonds in book-entry form which means certificates will not be issued
to evidence the bonds unless specifically requested at the time of purchase.

Zero Coupon
Maturity
Ten years from the issue date of the bond.
Interest
Interest will not be paid on the bonds. The bonds are being sold at an original-issue
discount. At maturity, you will receive the face amount of the bond.
Limitations
You may not assign or transfer the bonds except in certain special instances.
We will only repurchase bonds prior to maturity under limited circumstances.
Repurchases will generally be effected within sixty days' written notice of a repurchase
request.
Purchase Price
The purchase price of the bonds for a given month will be set forth on a sticker affixed to
the cover page of this prospectus. We will issue the bonds at a minimum face amount of
$6,000 or an integral multiple of $6,000.
Issue Date
First day of the month following the month in which the fiscal agent accepts the
subscription
No Certificate
We are issuing the bonds in book-entry form which means certificates will not be issued
to evidence the bonds unless specifically requested at the time of purchase.
28
Excerpted from the prospectus filings.

82