Sovereign Risk and Armed Conflict: An Event-study for Colombia

We study the relationship between some of the most important recent events of the Colombian armed conflict and the foreign perception of sovereign risk, as measured by the Credit Default Swap (CDS) of the Colombian bonds. Using a recent methodology we estimate the causal effect of conflict events widely publicized by the international media on the price of the CDS. We construct a Synthetic Control Group to use as the non-conflict counterfactual of the Colombian CDS and compare its behavior around relevant conflict-event days with that of the actual (conflict-affected) Colombian CDS. Results suggest that the impact of conflict on the foreign perception of sovereign risk is rather idiosyncratic, and depends on the political context surrounding each event.

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