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Victory or repudiation? Predicting winners in civil wars using international financial markets

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  • Mitchener, Kris James
  • Oosterlinck, Kim
  • Weidenmier, Marc D.
  • Haber, Stephen

Abstract

We develop a method to estimate which side will win a civil war using data from international financial markets. The key insight we deliver is that, for typical sovereign debt contracts, the probability of debt repayment will equal the probability of victory in a civil war. We test our predictor for standard outcomes in civil wars, including when the incumbent government loses (the Chinese Nationalists), when a new government is installed by a foreign power and decides to repudiate debt (the restoration of Ferdinand VII of Spain), and when there is a secession (the U.S. Confederacy). For China, markets were predicting a Communist victory three years before it happened. For the U.S., markets never gave the South much more than a 40 percent chance of maintaining the Confederacy. For Spain, markets considered the restoration of Ferdinand VII as likely (probabilities above 50%) as soon as France declared its intention to send military forces to the area.

Suggested Citation

  • Mitchener, Kris James & Oosterlinck, Kim & Weidenmier, Marc D. & Haber, Stephen, 2015. "Victory or repudiation? Predicting winners in civil wars using international financial markets," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 310-319.
    • Handle: RePEc:eee:jbfina:v:60:y:2015:i:c:p:310-319
    DOI: 10.1016/j.jbankfin.2015.07.009
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    2. Zhao, Yang & Yu, Min-Teh, 2020. "Predicting catastrophe risk: Evidence from catastrophe bond markets," Journal of Banking & Finance, Elsevier, vol. 121(C).

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    More about this item

    Keywords

    Civil wars; Predictions markets; Conflict; Asset prices;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets
    • N2 - Economic History - - Financial Markets and Institutions
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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