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The Effects of War Risk on U.S. Financial Markets

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  • Rigobon, Roberto
  • Sack, Brian P.

Abstract

This paper measures the effects of the risk of war on nine U.S. financial variables using a heteroskedasticity-based estimation technique. The results indicate that increases in the risk of war cause declines in Treasury yields and equity prices, a widening of lower-grade corporate spreads, a fall in the dollar, and a rise in oil prices. This "war risk factor" accounted for a considerable portion of the variance of these financial variables over the ten weeks leading up to the onset of war with Iraq.

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File URL: http://hdl.handle.net/1721.1/1848
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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 4417-03.

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Date of creation: 14 Apr 2003
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Handle: RePEc:mit:sloanp:1848

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
Phone: 617-253-2659
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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA

Related research

Keywords: War Risk; Stock Markets; Monetary Policy; Identification; Heteroskedasticity;

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References

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  1. Roberto Rigobon & Brian Sack, 2001. "Measuring the reaction of monetary policy to the stock market," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-14, Board of Governors of the Federal Reserve System (U.S.).
  2. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, Econometric Society, vol. 62(4), pages 901-33, July.
  3. Leigh, Andrew & Wolfers, Justin & Zitzewitz, Eric, 2003. "What do Financial Markets Think of War in Iraq?," Research Papers, Stanford University, Graduate School of Business 1785, Stanford University, Graduate School of Business.
  4. Evans, Martin D.D. & Lyons, Richard K., 2008. "How is macro news transmitted to exchange rates?," Journal of Financial Economics, Elsevier, Elsevier, vol. 88(1), pages 26-50, April.
  5. Roberto Rigobon & Brian Sack, 2002. "The impact of monetary policy on asset prices," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2002-4, Board of Governors of the Federal Reserve System (U.S.).
  6. Gabriele Fiorentini & Enrique Sentana Iváñez, 1997. "Identification, estimation and testing of conditionally heteroskedastic factor models," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 1997-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  7. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
  8. William D. Nordhaus, 2002. "The Economic Consequences of a War with Iraq," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1387, Cowles Foundation for Research in Economics, Yale University.
  9. Amihud, Yakov & Wohl, Avi, 2004. "Political news and stock prices: The case of Saddam Hussein contracts," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(5), pages 1185-1200, May.
  10. Steven J. Davis & Kevin M. Murphy & Robert H. Topel, 2006. "War in Iraq versus Containment," NBER Working Papers 12092, National Bureau of Economic Research, Inc.
  11. Siklos, Pierre L. & Bohl, Martin T. & Werner, Thomas, 2003. "Did the Bundesbank React to Stock Price Movements?," Discussion Paper Series 1: Economic Studies 2003,14, Deutsche Bundesbank, Research Centre.
  12. Rigobon, Roberto, 2002. "The curse of non-investment grade countries," Journal of Development Economics, Elsevier, Elsevier, vol. 69(2), pages 423-449, December.
  13. William D. Nordhaus, 2002. "The Economic Consequences of a War in Iraq," NBER Working Papers 9361, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Frijns, Bart & Tourani-Rad, Alireza & Indriawan, Ivan, 2012. "Political crises and the stock market integration of emerging markets," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(3), pages 644-653.
  2. Berkman, Henk & Jacobsen, Ben & Lee, John B., 2011. "Time-varying rare disaster risk and stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 101(2), pages 313-332, August.
  3. François-Xavier Delaloye & Michel Habib & Alexandre Ziegler, 2012. "Swiss banking secrecy: the stock market evidence," Financial Markets and Portfolio Management, Springer, Springer, vol. 26(1), pages 143-176, March.
  4. Fratzscher, Marcel & Stracca, Livio, 2009. "Does it pay to have the euro? Italy’s politics and financial markets under the lira and the euro," Working Paper Series, European Central Bank 1064, European Central Bank.
  5. He, Yinghua & Nielsson, Ulf & Wang, Yonglei, 2014. "The Cost of Political Tension: An Anatomy," TSE Working Papers, Toulouse School of Economics (TSE) 14-484, Toulouse School of Economics (TSE).
  6. Elena Corallo, 2005. "The effect of the war risk: a comparison of the consequences of the two Iraq wars on some financial variables," LIUC Papers in Economics, Cattaneo University (LIUC) 171, Cattaneo University (LIUC).
  7. Waldenström, Daniel & Frey, Bruno S., 2008. "Did nordic countries recognize the gathering storm of World War II? Evidence from the bond markets," Explorations in Economic History, Elsevier, Elsevier, vol. 45(2), pages 107-126, April.
  8. Massimo Guidolin & Eliana La Ferrara, 2010. "The economic effects of violent conflict: Evidence from asset market reactions," Journal of Peace Research, Peace Research Institute Oslo, Peace Research Institute Oslo, vol. 47(6), pages 671-684, November.
  9. Choudhry, Taufiq, 2010. "World War II events and the Dow Jones industrial index," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(5), pages 1022-1031, May.
  10. Charles, Amélie & Darné, Olivier, 2014. "Large shocks in the volatility of the Dow Jones Industrial Average index: 1928–2013," Journal of Banking & Finance, Elsevier, Elsevier, vol. 43(C), pages 188-199.
  11. Elena Corallo, 2007. "The effect of the war risk: a comparison of the consequences of the two Iraq wars," International Review of Economics, Springer, Springer, vol. 54(3), pages 371-382, September.

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