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Wednesday, August 4 • 1:00pm - 2:30pm
7C2 No Shock Waves through Wall Street? Market Responses to the Risk of Nuclear War

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David Finer, The University of Chicago Booth School of Business

With a growing literature documenting market impacts of climate risk, I use the Cold War to shed light on the extent to which market participants price the unobserved extreme tail of a salient risk. Exploiting the natural experiment of the Cuban Missile Crisis, I find that the geographic cross-section of firms’ equity returns in response to changes in the risk of nuclear conflict is broadly consistent with their headquarters' exposures to destruction. Such discrimination is plausible given contemporary survey evidence that investors generally believed that the US could recover from a nuclear war. A calibrated model informed by survey expectations suggests that: i.) investors underreact to the potential for catastrophe; ii.) investors exhibit a far lower level of risk aversion than is typically used to fit market data; or iii.) investor heterogeneity or noise makes survey data inaccurate indicators of investors' perceived exposures to extreme risks.


Hae-Kang Lee

University of South Carolina


David Andrew Finer

PhD graduate, University of Chicago

Wednesday August 4, 2021 1:00pm - 2:30pm EDT