March 20 2003
By Leon Gettler
Stockmarkets
might be rallying as investors bet that the US will smash Iraq, but watch out
for the "Saddameter" and "Saddam Security".
A
new joint study from Harvard University and Stanford Business School suggests
that war will reduce the S&P 500 by 15 per cent, equating to $US1.1 trillion
($A1.85 trillion) worth of sharemarket losses.
Analysis
of futures trading found that the US market was factoring in a number of
scenarios: a 70 per cent chance of war having a moderately negative 0-15 per
cent impact; a 20 per cent chance of it wiping out 15-30 per cent; and a 10 per
cent risk of a fall in excess of 30 per cent.
By
comparison, the S&P 500 slipped 6.5 after the outbreak of the Korean War and
5.5 per cent after September 11.
Justin
Wolfers and Eric Zitzewitz, assistant professors of economics at Stanford, and
Andrew Leigh from Harvard University, have used a so-called "Saddam
Security" to help predict and measure how markets will respond to war.
Trading
on a new online exchange the Saddam Security has purportedly provided a running
market estimate of the probability of war.
The
researchers tracked Saddam Security movements, and compared them with oil
futures markets. Using a mathematical technique called regression analysis, they
then compared the Saddam Securities with the "Saddameter", a device
created by Slate.com columnist William Saletan to predict the likelihood of
invasion.