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

Roberto Rigobon
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Brian P. Sack
Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section

March 26, 2003

MIT Sloan Working Paper No. 4417-03

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.

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

JEL Classifications: E0

Working Paper Series

Date posted: April 01, 2003 ; Last revised: April 05, 2003

Suggested Citation

Sack, Brian P. and Rigobon, Roberto, The Effects of War Risk on U.S. Financial Markets (March 26, 2003). MIT Sloan Working Paper No. 4417-03. Available at SSRN: http://ssrn.com/abstract=390980 or doi:10.2139/ssrn.390980

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Contact Information

Roberto Rigobon (Contact Author) Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email ) E52-447 Cambridge, MA 02142 United States 617-258-8374 (Phone) 617-258-6855 (Fax)
National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge, MA 02138 United States
Brian P. Sack Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section ( email ) 20th and C Streets, NW Washington, DC 20551 United States 202-736-5671 (Phone) 202-452-2301 (Fax)