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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.

Suggested Citation

  • Rigobon, Roberto & Sack, Brian P., 2003. "The Effects of War Risk on U.S. Financial Markets," Working papers 4417-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  • Handle: RePEc:mit:sloanp:1848
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    File URL: http://hdl.handle.net/1721.1/1848
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    References listed on IDEAS

    as
    1. Rigobon, Roberto, 2002. "The curse of non-investment grade countries," Journal of Development Economics, Elsevier, pages 423-449.
    2. William D. Nordhaus, 2002. "The Economic Consequences of a War with Iraq," Cowles Foundation Discussion Papers 1387, Cowles Foundation for Research in Economics, Yale University.
    3. Roberto Rigobon & Brian P. Sack, 2001. "Measuring the reaction of monetary policy to the stock market," Finance and Economics Discussion Series 2001-14, Board of Governors of the Federal Reserve System (U.S.).
    4. 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.
    5. Rigobon, Roberto & Sack, Brian, 2004. "The impact of monetary policy on asset prices," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1553-1575, November.
    6. Martin D. D. Evans & Richard K. Lyons, 2017. "How is Macro News Transmitted to Exchange Rates?," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 14, pages 547-596 World Scientific Publishing Co. Pte. Ltd..
    7. 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.
    8. Leigh, Andrew & Wolfers, Justin & Zitzewitz, Eric, 2003. "What do Financial Markets Think of War in Iraq?," Research Papers 1785, Stanford University, Graduate School of Business.
    9. Sentana, Enrique & Fiorentini, Gabriele, 2001. "Identification, estimation and testing of conditionally heteroskedastic factor models," Journal of Econometrics, Elsevier, pages 143-164.
    10. William D. Nordhaus, 2002. "The Economic Consequences of a War in Iraq," NBER Working Papers 9361, National Bureau of Economic Research, Inc.
    11. Amihud, Yakov & Wohl, Avi, 2004. "Political news and stock prices: The case of Saddam Hussein contracts," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 1185-1200, May.
    12. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
    13. Roberto Rigobon & Brian P. Sack, 2002. "The Impact of Monetary Policy on Asset Prices," Finance and Economics Discussion Series 2002-04, Board of Governors of the Federal Reserve System (U.S.).
    14. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, vol. 62(4), pages 901-933, July.
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    More about this item

    Keywords

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

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E0 - Macroeconomics and Monetary Economics - - General

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