Clark, Ephraim Alois and Lakshmi, Geeta (2003) War and emerging market default risk: the case of India and the Iraqi invasion of Kuwait. International Journal of Business, 8 (4). ISSN 1083-4346

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Abstract

We use the performance of Indian Eurobonds over the period 1990-1992 to examine the sensitivity of India's creditworthiness to the Iraqi invasion of Kuwait on August 2, 1990. We also explore the related question of whether the changes in creditworthiness, measured as the effect of changes in default probabilities on bond prices, were accurately assessed by the market in a timely manner. We find that the markets systematically mis-estimated these effects. They anticipated no effects on India's default probabilities in the invasion quarter. All the change in Indian bond prices in the quarter that the invasion took place was due to changes in the risk free term structure of interest rates. In the quarter following the invasion, effects of changes in default probabilities were significant and caused a fall of nearly 3 points in Indian Eurobond prices. In the quarter when the Gulf War took place changes in default probabilities caused a further fall of 1.34 points in Indian bond prices. We find evidence of market over-reaction to country specific invasion effects

Item Type:	Article
Additional Information:	We use the performance of Indian Eurobonds over the period 1990-1992 to examine the sensitivity of India's creditworthiness to the Iraqi invasion of Kuwait on August 2, 1990. We also explore the related question of whether the changes in creditworthiness, measured as the effect of changes in default probabilities on bond prices, were accurately assessed by the market in a timely manner. We find that the markets systematically mis-estimated these effects. They anticipated no effects on India's default probabilities in the invasion quarter. All the change in Indian bond prices in the quarter that the invasion took place was due to changes in the risk free term structure of interest rates. In the quarter following the invasion, effects of changes in default probabilities were significant and caused a fall of nearly 3 points in Indian Eurobond prices. In the quarter when the Gulf War took place changes in default probabilities caused a further fall of 1.34 points in Indian bond prices. We find evidence of market over-reaction to country specific invasion effects
Keywords:	Term structure of interest rates, Duration, Spline
Subjects:	N Business and Administrative studies > N300 Finance
Divisions:	College of Social Sciences > Faculty of Business & Law > Lincoln Business School
Depositing User:	Bev Jones
Date Deposited:	05 Sep 2007
Last Modified:	18 Jul 2011 16:16
URI:	http://eprints.lincoln.ac.uk/id/eprint/1127

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