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Asset Values and the Credibility of Peace Agreements

  • Christopher Coyne

    (Department of Economics, West Virginia University)

  • Gregory Dempster

    (Department of Economics, Hampden-Sydney College)

  • Justin Isaacs

    (Department of Economics, Hampden-Sydney College)

Continuous violent conflict is a central cause of economic stagnation in many of the world’s poorest countries. Peace agreements are one common tool used to attempt to break these ‘conflict traps.’ However, these agreements often fail due to the lack of a clear and credible commitment by the parties involved in the contract. We contend that long-term financial asset values will reflect the credibility of the participants to peace agreements because the expectation of sustained peace will result in higher long-term asset prices. We utilize equity index prices from Sri Lanka to test our theory. We also consider the accuracy of equity prices versus other predictors of credibility including exchange rates and survey responses. Our conclusion is that long-term financial asset prices indicate the likelihood of conflict or peace and can inform policies as they relate to conflict-torn states.

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File URL: http://www.be.wvu.edu/phd_economics/pdf/09-07.pdf
File Function: First version, 2009
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Paper provided by Department of Economics, West Virginia University in its series Working Papers with number 09-07.

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Length: 43 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:wvu:wpaper:09-07
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Web page: http://www.be.wvu.edu/phd_economics/
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  1. Anindya Banerjee & Robin L. Lumsdaine & James H. Stock, 1990. "Recursive and Sequential Tests of the Unit Root and Trend Break Hypothesis: Theory and International Evidence," NBER Working Papers 3510, National Bureau of Economic Research, Inc.
  2. Willard, Kristen L & Guinnane, Timothy W & Rosen, Harvey S, 1996. "Turning Points in the Civil War: Views from the Greenback Market," American Economic Review, American Economic Association, vol. 86(4), pages 1001-18, September.
  3. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  4. North, Douglass C. & Weingast, Barry R., 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 803-832, December.
  5. Auernheimer, Leonardo & Lozada, Gabriel A, 1990. "On the Treatment of Anticipated Shocks in Models of Optimal Control with Rational Expectations: An Economic Interpretation," American Economic Review, American Economic Association, vol. 80(1), pages 157-69, March.
  6. Wells, John & Wills, Dougals, 2000. "Revolution, Restoration, and Debt Repudiation: The Jacobite Threat to England's Institutions and Economic Growth," The Journal of Economic History, Cambridge University Press, vol. 60(02), pages 418-441, June.
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