War and Emerging Market Default Risk: The Case of India and the Iraqi Invasion of Kuwait

14 Pages Posted: 6 Oct 2003  

Ephraim Clark

Middlesex University Business School

Geeta Lakshmi

University of Nottingham

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.

Keywords: Term structure of interest rates, Duration, Spline

JEL Classification: O530, O160, G150, P330, F340

Suggested Citation

Clark, Ephraim and Lakshmi, Geeta, War and Emerging Market Default Risk: The Case of India and the Iraqi Invasion of Kuwait. International Journal of Business, Vol. 8, No. 4, 2003. Available at SSRN: https://ssrn.com/abstract=450000 or http://dx.doi.org/10.2139/ssrn.450000

Ephraim Clark (Contact Author)

Middlesex University Business School ( email )

The Burroughs
London, NW4 4BT
United Kingdom

Geeta Lakshmi

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

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