Market Anticipations of Conflict Onsets
50 Pages Posted: 13 Apr 2016
Date Written: April 11, 2016
Does the recurrence of wars suggest that we are doomed to repeat the errors of the past, and fail to recognize dangerous situations for what they are? Unfortunately, little is known about how well wars are anticipated. Do conflicts tend to come as a surprise? We estimated the risk of war as perceived by contemporaries of all inter- and intra-state conflicts between 1816 and 2007. Using historical data of government bond yields, we find that market participants tend to underestimate the risk of war prior to its onset, and to react with surprise immediately thereafter. We also show that the forecasting record has not improved over the past 200 years, and that wars involving democracies lead to greater market shocks. Our results have implications for the way decision-makers respond to new information, and how audiences perceive the risk of war and hence their leaders' actions.
Keywords: Forecasting, War, Conflict, Financial markets, Government bonds
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