IMF Working Papers

We study how sovereign bond markets respond to earthquakes in emerging markets, using data from 96 countries between 2012 and 2023. While earthquakes raise spreads on average, the effect depends critically on state capacity. In low-capacity countries, spreads rise sharply and persist; in high-capacity states, they remain stable or fall. These effects appear immediately, last several months, and are robust to multiple controls and placebo tests. Our findings suggest that markets interpret disasters not simply as economic shocks but as institutional stress tests, penalizing fragile states. Institutional quality, in this context, acts as disaster insurance.