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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page 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

Full paper (216 KB PDF)

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Last update: May 13, 2003