Working Paper: CEPR ID: DP10109
Authors: Stephen Haber; Kris James Mitchener; Kim Oosterlinck; Marc D. Weidenmier
Abstract: We develop a method to estimate which side will win a civil war. 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.
Keywords: asset prices; civil wars; conflict; predictions; markets
JEL Codes: F3; G1; N2; O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| probability of debt repayment (F34) | probability of victory in a civil war (D74) |
| battlefield setbacks for the Confederacy (D74) | bond prices (G12) |
| bond prices (G12) | probability of victory in a civil war (D74) |