May 1, 2010

Asset Values and the Sustainability of Peace Prospects

  • Christopher Coyne

    Associate Director, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics
  • Justin P. Isaacs

    Professor of Economics and Business, Hampden-Sydney College
  • Gregory M. Dempster

    Elliott Professor of Economics and Business, Hampden-Sydney College
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Continuous violent conflict is a central cause of economic stagnation in many of the world's poorest countries. Given that attempts to achieve peace in these countries often remain elusive, it is important to identify mechanisms which reveal the sustainability of peace over time. This paper argues that long-term financial asset values reflect the sustainability of peace prospects because the expectation of continued peace will result in higher long-term asset prices. Equity index prices from Sri Lanka are used to test this theory. Also considered are the accuracy of equity prices versus other predictors of sustainable peace, including exchange rates and survey responses. The main 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 areas.

Read the article at ScienceDirect.