The Power of Financial Markets: How Government Bonds Expect and Affect International Conflict

Committee: Brian Lai (Chair), Sara M. Mitchell, Frederick J. Boehmke, Artem Durnev (Finance), and Quan Li (Texas A&M University)


This study examines how sovereign bond markets affect and are affected by international conflict. Many assume that international conflict harms states’ credit; however, existing research on finance have little investigated specifically through what channel international conflict disturbs sovereign bond markets and the extent of the effect. On the other hand, even though government bonds have been used as primary means for states to finance conflict, most empirical studies on conflicts have not factored in the financial costs of conflict. On the basis of rational expectations and bargaining theory, this study delves into the questions of how essential international investors are for states to draw financial resources, what role finance plays in international conflict, and how it constrains or gives leeway to states’ conflict decisions. I show that the effect of conflict on sovereign borrowing costs is conditional on bondholders’ evaluations of the actual risk that conflict is expected to impose on their investments. The change in mean or variance of sovereign borrowing costs, in turn, affect conflict participants’ escalation or termination actions, by serving as financial pressure. The state with a distinctly higher/more volatile borrowing cost compared to the other side is expected to try to open negotiations or back down, while the other side tends to claim more in the bargaining process knowing its enemy has a higher expected cost. I analyze international conflicts and government bond yields of more than 30 countries, including both developed and developing ones, for the period of 1823-2007, by employing advanced time series methods.



Solt, Frederick, Dongkyu Kim, Kyu Young Lee, Spencer Williardson, and Seokdong Kim. 2014. “Neoliberal Reform and Protest in Latin American democracies: A replication and Correction.” Research and Politics 1(2): 1-13.


Do neoliberal economic reforms in Latin American democracies mobilize citizens to overcome their collective action problems and protest? A recent addition to the scholarship on this crucial question of the relationship of markets and politics, Bellinger and Arce (2011), concludes that economic liberalization does have this effect, working to repoliticize collective actors and reinvigorate democracy. We reexamine the article’s analyses and demonstrate that they misinterpret the marginal effect of the variables of theoretical interest. Thus, the article’s optimistic claims about the consequences for democracy of economic liberalization in the region are not supported by its own empirical results. It is argued here that its results suggest instead that protests became more common in autocracies when they moved away from markets. Rather than speaking to how people have mobilized to protest against liberal reforms in Latin America’s democracies, the work’s analyses illuminate only when people protested against the region’s dictatorships.

Jung, Ha-Lyong, and Kyu Young Lee. 2012. “Who voted for or against FTA? An Analysis of the KORUS FTA case.” Peace Studies 20(1): 5-30 (published in Korean).


One of the important topics regarding the expansion of free trade is what factors form domestic preferences on free trade policy. Economic interests depending on factor endowment and mobility are claimed to be the basis of domestic support. The KORUS FTA (Korea-US Free Trade Agreement), ratified by the National Assembly of Korea in 2011, is a useful case to examine whether constituency economic interests determine the voting decisions of the Representatives even under the political landscape that partisanship dominates. Based on the endogenous tariff policy arguments, this study tests the Stolper-Samuelson and the Ricardo-Viner models in the context of the KORUS FTA. After controlling for the effect of partisan affiliation of the Representatives, this study finds that economic interests of constituents are a main determinant of Representatives’ voting for or against FTA.


Working Papers

“Cannon Fire is Bad for Money? An Analysis of the Effect of International Conflict on Sovereign Borrowing Costs” (Under Review)


How do international crises affect the holders of government bonds? While many studies discuss the disruptive effect of international conflict on trade or foreign direct investment on the basis of commercial liberalism, few analyses focusing on the foreign portfolio investment have asked the same question, despite financial markets typically responding to international conflicts negatively. I examine the specific channel through which international crises disturb sovereign bond markets and the extent of the effect. I analyze my theory of how investors respond to international crises by using a dataset of Militarized Interstate Disputes and the values of government bonds of 32 countries for 1970—1992. My results of panel regressions show that investors do not always react negatively when they observe their bond issuer engaged in an international dispute. Instead, they assess the actual risk that the interstate dispute would impose on their bond investment. Bondholders’ risk assessments are conditional on how likely a dispute is to escalate to war and the economic development status of their bond issuer. Investors show more sensitive reactions to major clashes than minor quibbles among states and are easily shaken by the fear of uncertainty when they invest in developing countries.

“The Effect of Sovereign Borrowing Costs on the Conflict Outcomes”


How does a state’s borrowing cost affect the outcome of international conflict? We commonly agree that money plays an important role in conflict and external borrowing has been considered as one of the main measures for states to collect revenue and finance conflict. However, the studies on the effect of sovereign borrowing costs on conflict termination has little developed from the argument that states that enjoy cheaper credit are more likely to win a war. In this study, I examine how sovereign borrowing costs influence less severe conflict situations that are not escalated into war yet. On the basis of the bargaining model, I investigate whether high sovereign borrowing cost contributes to heavy financial pressure on a state by raising its (expected) costs of conflict and leads to an unfavorable conflict outcome eventually. Especially, I focus on states’ perception of financial pressure that sovereign borrowing costs impose, by looking at the extent to which states rely on borrowing in financing its economy. By employing multinomial logistic regressions, I analyze sovereign borrowing costs of 57 countries and Militarized Interstates Disputes for the period of 1816 to 2007. I show that the effect of sovereign borrowing costs on states’ win probability decreases as states are more heavily indebted, whereas the marginal effect of sovereign borrowing costs on the likelihood of defeat does not vary much across different levels of states’ indebtedness.

“Protest and Economic Liberalization in Asian Democracies”


Do people protest against liberalizing reforms more in democracies or semidemocracies than in autocracies? This article tests the existing contentious views on the relationship among economic liberalization, regime type, and collective political activity (demobilization vs. repoliticization argument) based on time-series cross-sectional data from 20 Asian countries for the 1972-2003 period. By conducting negative binomial regression analyses by six different reform sectors, this article finds that collective political activity does not rise with economic liberalization in democratic or semidemocratic contexts compared to autocratic settings across all of the sectors but agricultural one. Even if semidemocracy or democracy has provided a more favorable environment to challenge neoliberal reforms in agricultural markets, in general, the wave of economic liberalization has undermined the mobilization of people despite the presence of democracy in Asian countries.

“Protest against IMF intervention”

“An Analysis on Negotiations with IMF and Government bonds”