Earthquakes and Emerging Market Sovereign Bond Spreads

IMF Working Papers, October 24, 2025

Source details

Study period and sample: data from 96 countries between 2012 and 2023.
Average effect: earthquakes raise sovereign bond spreads on average.
Heterogeneity by state capacity:
- In low-capacity countries, spreads rise sharply and persist.
- In high-capacity states, spreads remain stable or fall.
Timing and persistence:
- These effects appear immediately and last several months.
Robustness:
- Results are robust to multiple controls and placebo tests.
Interpretation:
- Markets interpret disasters not simply as economic shocks but as institutional stress tests, penalizing fragile states.
- Institutional quality functions as disaster insurance.

Empirical focus: sovereign bond market responses to earthquakes in emerging markets.
Temporal coverage: 2012–2023.
Cross-country sample size: 96 countries.
Outcomes examined: sovereign bond spreads and their evolution following earthquake events.
Controls and validation: multiple controls and placebo tests applied to assess robustness.

Institutional quality and state capacity materially alter market reactions to natural disasters.
Strengthening state capacity and institutional quality can mitigate adverse sovereign bond market outcomes following earthquakes.
Markets price institutional fragility as part of disaster risk assessment, implying a role for policy reforms that enhance resilience and signaling.