What Do Financial Markets Think of War in Iraq?

Stanford GSB Research Paper No. 1785

45 Pages Posted: 14 Apr 2003

See all articles by Andrew Leigh

Andrew Leigh

Australian House of Representatives Parliament House; Centre for Applied Macroeconomic Analysis, ANU; IZA

Justin Wolfers

University of Michigan at Ann Arbor - Department of Economics; University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; The University of Sydney - Discipline of Economics; Brookings Institution - Economic Studies Program; Peter G. Peterson Institute for International Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Kiel Institute for the World Economy

Eric Zitzewitz

Dartmouth College; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: March 18, 2003

Abstract

We analyze financial market data in order to produce an ex-ante assessment of the economic consequences of war with Iraq. The novel feature of our analysis derives from the existence of a market for "Saddam Securities," a new future traded on an online betting exchange that pays only if Saddam Hussein is ousted. A variety of tests suggest that this future's price provides a plausible estimate of the probability of war. The spot oil price has moved closely with the Saddam Security, suggesting that war raises oil prices by around $10 per barrel. Futures prices imply that markets expect these large immediate disruptions to dissipate quickly, with prices returning to pre-war levels within about a year and a half. Evidence on the long-run effects is fragile, and while prices are probably expected to fall a little as a result of war, any "oil dividend" will be minimal. We find large effects in equity markets: And war lowers the value of U.S. equities by around 15 percent. This effect is concentrated in the consumer discretionary sector, airlines and IT; the prospect of war bolsters the gold and energy sectors. Analyzing option prices, we find that the large estimated average effects of war reflect the market pricing in a range of different scenarios - a 70 percent probability that it will lead to market declines of 0 to 15 percent, a 20 percent chance of 15 to 30 percent declines, and a 10 percent risk of a fall in excess of 30 percent. Across countries, the most extreme effects are on the stock markets of Turkey, Israel, and several European nations. Countries that are highly enmeshed in the world economy, or net oil importers, are most likely to experience adverse effects from war.

Keywords: War in Iraq, Financial market efficiency, Security markets, Iowa Presidential market, International financial markets, Oil price, Cost of war

JEL Classification: G14, G15, H56

Suggested Citation

Leigh, Andrew and Wolfers, Justin and Zitzewitz, Eric W., What Do Financial Markets Think of War in Iraq? (March 18, 2003). Stanford GSB Research Paper No. 1785, Available at SSRN: https://ssrn.com/abstract=388762 or http://dx.doi.org/10.2139/ssrn.388762

Andrew Leigh (Contact Author)

Australian House of Representatives Parliament House ( email )

Canberra, 2600
Australia

Centre for Applied Macroeconomic Analysis, ANU ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

IZA ( email )

Justin Wolfers

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
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HOME PAGE: http://www.nber.org/~jwolfers

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

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HOME PAGE: http://www.nber.org/~jwolfers

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Brookings Institution - Economic Studies Program ( email )

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Peter G. Peterson Institute for International Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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HOME PAGE: http://www.nber.org/~jwolfers

IZA Institute of Labor Economics

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Centre for Economic Policy Research (CEPR)

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Kiel Institute for the World Economy ( email )

P.O. Box 4309
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Eric W. Zitzewitz

Dartmouth College ( email )

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603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~ericz

NBER ( email )

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