Wars, Threats, and the Sovereign Bond Market

Jonathan Federle, Robin Greenwood, Josefin Meyer, Carmen Reinhart and Christoph Trebesch

No 2186, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We study how wars and military threats affect financial markets. Leveraging more than 300,000 monthly price observations since 1822, we create an external currency bond index for more than 90 countries—the EXBI. Using the EXBI, we document large effects of wars on returns and borrowing costs. In a global external bond portfolio, a one-standard-deviation war shock lowers returns by five percentage points. At the country level, wars at home generate sharp losses and increase default risk. Military threats depress bond prices in threatened states, but not in threatening ones, highlighting their role as a channel for geoeconomic coercion.

Keywords: sovereign bond returns; war risk; geopolitical risk; militarized disputes; sovereign default; global financial history; conflict and finance; international capital markets (search for similar items in EconPapers)
JEL-codes: E44 F34 G15 H56 N20 (search for similar items in EconPapers)
Pages: 41, XVII p.
Date: 2026
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