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

“The Effects of War Risk on U.S. Financial Markets" with Brian Sack

This paper measures the effects of the risk of war on nine U.S. financial variables using a heteroskedasticity-based estimation technique. The results indicate that increases in the risk of war cause 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. The “war risk factor” accounted for a considerable portion of the variance of these financial variables over the ten weeks leading up to the onset of war with Iraq.

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