The Effects of War Risk on U.S. Financial Markets

Sack, Brian P.; Rigobon, Roberto

doi:10.2139/ssrn.412281

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The Effects of War Risk on U.S. Financial Markets

18 Pages Posted: 19 Jun 2003

See all articles by Brian P. Sack

Brian P. Sack

Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

There are 3 versions of this paper

Date Written: May 2003

Abstract

This paper measures the effects of the risks associated with the war in Iraq on various U.S. financial variables using a heteroskedasticity-based estimation technique. The results indicate that increases in what we call the "war risk" factor caused declines in Treasury yields and equity prices, a widening of lower-grade corporate spreads, a fall in the dollar, and a rise in oil prices. This factor accounted for a considerable portion of the variances of these financial variables over the three months leading up to the arrival of coalition forces in central Baghdad.

Keywords: War, flight to quality, heteroskedasticity, identification

JEL Classification: G12, G14

Suggested Citation: Suggested Citation

Sack, Brian P. and Rigobon, Roberto, The Effects of War Risk on U.S. Financial Markets (May 2003). Available at SSRN: https://ssrn.com/abstract=412281 or http://dx.doi.org/10.2139/ssrn.412281