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

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Author Info
Rigobon, Roberto
Sack, Brian P.

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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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Publisher 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

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

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Andrew Leigh & Justin Wolfers & Eric Zitzewitz, 2003. "What Do Financial Markets Think of War in Iraq?," NBER Working Papers 9587, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, vol. 62(4), pages 901-33, July. [Downloadable!] (restricted)
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  3. Sentana, Enrique & Fiorentini, Gabriele, 2001. "Identification, estimation and testing of conditionally heteroskedastic factor models," Journal of Econometrics, Elsevier, vol. 102(2), pages 143-164, June. [Downloadable!] (restricted)
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  4. Roberto Rigobon & Brian Sack, 2001. "Measuring the Reaction of Monetary Policy to the Stock Market," NBER Working Papers 8350, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. William D. Nordhaus, 2002. "The Economic Consequences of a War with Iraq," Cowles Foundation Discussion Papers 1387, Cowles Foundation, Yale University. [Downloadable!]
  6. 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. [Downloadable!]
  7. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, 09. [Downloadable!] (restricted)
  8. William D. Nordhaus, 2002. "The Economic Consequences of a War in Iraq," NBER Working Papers 9361, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Roberto Rigobon & Brian Sack, 2002. "The impact of monetary policy on asset prices," Finance and Economics Discussion Series 2002-4, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  10. Martin D. D. Evans & Richard K. Lyons, 2003. "How is Macro News Transmitted to Exchange Rates?," NBER Working Papers 9433, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Massimo Guidolin & Eliana La Ferrara, 2005. "The economic effects of violent conflict: evidence from asset market reactions," Working Papers 2005-066, Federal Reserve Bank of St. Louis. [Downloadable!]
  2. Marcel Fratzscher & Livio Stracca, 2009. "Does it pay to have the euro? Italy’s politics and financial markets under the lira and the euro," Working Paper Series 1064, European Central Bank. [Downloadable!]
  3. Elena Corallo, 2007. "The effect of the war risk: a comparison of the consequences of the two Iraq wars," International Review of Economics, Springer, vol. 54(3), pages 371-382, September. [Downloadable!] (restricted)
  4. 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 171, Cattaneo University (LIUC). [Downloadable!]
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