Stock Volatility and the War Puzzle / Gustavo S. Cortes, Angela Vossmeyer, Marc D. Weidenmier.

Format:

Book

Author/Creator:

Cortes, Gustavo S.

Contributor:

National Bureau of Economic Research.

Vossmeyer, Angela.

Weidenmier, Marc D.

Series:

Working Paper Series (National Bureau of Economic Research) no. w29837.

NBER working paper series no. w29837

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

U.S. stock volatility is 33 percent lower during wartime and periods of conflict. This is true even for World Wars I and II, which would seemingly increase uncertainty. In a seminal paper, Schwert (1989) identified the "war puzzle" as one of the most surprising facts from two centuries of stock volatility data. We propose an explanation for the puzzle: the profits of firms become easier to forecast during wartime due to massive government spending. We test this hypothesis using newly-constructed data on more than 100 years of defense spending. The aggregate analysis finds that defense spending reduces stock volatility. The sector level regressions show that defense spending predicts lower stock volatility for firms that produce military goods. Finally, an event-study demonstrates that earnings forecasts of defense firms by equity analysts become significantly less disperse after 9/11 and the invasions of Afghanistan (2001) and Iraq (2003).

Notes:

Print version record

March 2022.