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What Do Markets Say About WarAugust, 2003 In the weeks preceding the U.S. invasion of Iraq, two Business School professors started tracking betting odds on Saddam Hussein's survival. The Saddam Security, an Irish-based online exchange at www.tradesports.com, paid $10 per share if Saddam was ousted by June 30. Justin Wolfers and Eric Zitzewitz, along with Andrew Leigh, who is a doctoral student at the John F. Kennedy School of Government at Harvard, compared the price movements of the Saddam Security to movements in stock prices, oil prices, and oil futures to get an estimate of the cost of threatening a war. Some of what they found: As the probability of war rose, oil prices rose, indicating that the market estimated the war would raise oil prices by $10 per barrel in the short term. Oil futures indicated this price spike was expected to be short, and that the war was expected to lead to slightly lower oil prices in the long run—an average one-time savings of about $250 per American. The anticipated effects of the war, the threesome estimated, reduced the S&P 500 by 15 percent, or the equivalent of a $1.1 trillion loss of wealth when compared with a no-war alternative. The response of stock markets in 44 other countries indicated investors thought those most likely to be adversely affected by war in Iraq were countries that are major oil importers or are tightly enmeshed in the world economy. "Option prices revealed that the source of the large market discount was a small probability of an extremely bad outcome," Zitzewitz said. "As it turned out, the war went better than the markets feared, and the U.S. and other markets recovered about half of the pre-war discount." Related Research Article |
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