Stock Volatility and the War Puzzle: The Military Demand Channel
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.
Non-Technical Summaries
- Wars and other periods of conflict typically heighten political uncertainty, but US stock volatility is 33 percent lower than usual in...
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