Stock Volatility and the War Puzzle

34 Pages Posted: 14 Mar 2022 Last revised: 11 Jul 2022

See all articles by Gustavo Cortes

Gustavo Cortes

Warrington College of Business, University of Florida

Angela Vossmeyer

Claremont McKenna College - Robert Day School of Economics and Finance

Marc Weidenmier

Chapman University

Date Written: March 2022

Abstract

U.S. stock volatility is 33 percent lower during wartime and periods of conflict. This is true even for World Wars I and II, which would seemingly increase uncertainty. In a seminal paper, Schwert (1989) identified the “war puzzle” as one of the most surprising facts from two centuries of stock volatility data. We propose an explanation for the puzzle: the profits of firms become easier to forecast during wartime due to massive government spending. We test this hypothesis using newly-constructed data on more than 100 years of defense spending. The aggregate analysis finds that defense spending reduces stock volatility. The sector level regressions show that defense spending predicts lower stock volatility for firms that produce military goods. Finally, an event-study demonstrates that earnings forecasts of defense firms by equity analysts become significantly less disperse after 9/11 and the invasions of Afghanistan (2001) and Iraq (2003).

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Suggested Citation

Cortes, Gustavo and Vossmeyer, Angela and Weidenmier, Marc, Stock Volatility and the War Puzzle (March 2022). NBER Working Paper No. w29837, Available at SSRN: https://ssrn.com/abstract=4056791

Gustavo Cortes (Contact Author)

Warrington College of Business, University of Florida ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

HOME PAGE: http://warrington.ufl.edu/directory/person/9136/

Angela Vossmeyer

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

Marc Weidenmier

Chapman University ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
9
Abstract Views
146
PlumX Metrics