Risk, Uncertainty, and the Perceived Threat of Terrorist Attacks

59 Pages Posted: 8 Oct 2012

See all articles by T. Shawn Strother

T. Shawn Strother

University of Nebraska-Lincoln

Michael S. Pagano

Villanova University - Villanova School of Business

Date Written: May 1, 2012

Abstract

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

Strother, Timothy Shawn and Pagano, Michael S., Risk, Uncertainty, and the Perceived Threat of Terrorist Attacks (May 1, 2012). Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2148882 or http://dx.doi.org/10.2139/ssrn.2148882

Timothy Shawn Strother (Contact Author)

University of Nebraska-Lincoln ( email )

Lincoln, NE 68588-0490
United States

HOME PAGE: http://www.unl.edu

Michael S. Pagano

Villanova University - Villanova School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States
(610) 519-4389 (Phone)

HOME PAGE: http://www90.homepage.villanova.edu/michael.pagano

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