Risk, Uncertainty, and the Perceived Threat of Terrorist Attacks

Information provided by the U.S. Department of Homeland Security regarding potential terrorist attacks significantly affects U.S. equity and Treasury securities markets. When the government announces heightened terror alert levels, investors’ perceptions of risk increase (as measured by both conditional volatility of returns and implied volatility on Standard P however, equity market responses to these threat-related announcements have declined monotonically over time.