Keywords: War, flight to quality, heteroskedasticity, identification
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.
Full paper (216 KB PDF)
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Last update: May 13, 2003