Are Capital Markets Color-Blind? The Impact of the Homeland Security Alert Level on Capital Markets

Abstract:     
This paper examines whether changes in the color-coded terror alert level set by the U.S. Department of Homeland Security affect U.S. capital markets. The alert level has changed 17 times (9 times raised and 8 times lowered) from the time the alert system was established on March 12, 2002 until September 21, 2006. Using daily index data for the main U.S. capital markets and employing a standard event study framework, I find that markets do not react significantly to changes in the terror level. A heteroscedasticity-based estimation technique using information provided by the second moments of financial variables and other tests using data on industry level, trading volume, interest rates and U.K. stock prices also indicate minimal responses of capital markets to changes in threat levels. It appears that from the investors' point of view, threat level changes are not informative, or the amount of information they provide is minor.

Number of Pages in PDF File: 38

Keywords: Terrorism, Capital Markets, Homeland Security Advisory System (HSAS), Color-Coded Threat Level

JEL Classification: G14, H56

working papers series