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Stock Volatility and the War Puzzle: The Military Demand Channel

Author

Listed:
  • Gustavo S. Cortes
  • Angela Vossmeyer
  • Marc D. Weidenmier

Abstract

U.S. stock volatility is 25 percent lower during wartime and periods of conflict, including World War II. Schwert (1989) identified the “war puzzle” as a surprising fact from two centuries of realized stock volatility data. We hypothesize that stable demand from defense spending makes corporate America’s cash flows easier to forecast during wartime. Using new hand-collected data on 100 years of military spending, we document that defense outlays reduce aggregate, sector- and state-level stock volatility. Firm-level event studies of recent U.S. military conflicts demonstrate that equity analysts’ earnings forecasts of procurement-intensive companies became significantly less dispersed in the aftermath of 9/11 and the invasion of Iraq.

Suggested Citation

  • Gustavo S. Cortes & Angela Vossmeyer & Marc D. Weidenmier, 2022. "Stock Volatility and the War Puzzle: The Military Demand Channel," NBER Working Papers 29837, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29837
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    Cited by:

    1. Molero-González, L. & Trinidad-Segovia, J.E. & Sánchez-Granero, M.A. & García-Medina, A., 2023. "Market Beta is not dead: An approach from Random Matrix Theory," Finance Research Letters, Elsevier, vol. 55(PA).
    2. Wu, Feng-lin & Zhan, Xu-dong & Zhou, Jia-qi & Wang, Ming-hui, 2023. "Stock market volatility and Russia–Ukraine conflict," Finance Research Letters, Elsevier, vol. 55(PA).

    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • G1 - Financial Economics - - General Financial Markets
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-

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