Risk, Uncertainty, and the Perceived Threat of Terrorist Attacks
59 Pages Posted: 8 Oct 2012
Date Written: May 1, 2012
Information provided by the U.S. Department of Homeland Security regarding potential terrorist attacks significantly affects U.S. equity and Treasury securities markets. When the government announces heightened terror alert levels, investors’ perceptions of risk increase (as measured by both conditional volatility of returns and implied volatility on Standard &Poor’s 500 Index options), and investors purchase 1-month and 1-year Treasury bills and 3-year, 5-year, 7-year, and 10-year U.S. Treasuries in a “flight-to-quality” episode. Partial anticipation of increased threat level announcements is stronger than the anticipation of announcements regarding the federal funds rate during the 10 days prior to an announcement. We also find evidence that informed traders are more active when there is an increased threat of an attack; however, equity market responses to these threat-related announcements have declined monotonically over time.
Keywords: Terrorism, flight to quality, GARCH
JEL Classification: D82,C32,G12
Suggested Citation: Suggested Citation