Finance and Economics Discussion Series (FEDS)
May 2003
The Effects of War Risk on U.S. Financial Markets
Roberto Rigobon and Brian Sack
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
PDF: Full Paper
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