Risk, Uncertainty, and the Perceived Threat of Terrorist Attacks: Evidence of Flight-to-Quality

Abstract

Information provided by the U.S. Department of Homeland Security regarding potential terrorist attacks significantly affects U.S. Treasury securities markets. When the government announces heightened terror alert levels, investors’ perceptions of risk increase and investors purchase 1-month and 1-year Treasury bills and 3-year, 5-year, 7-year, and 10-year U.S. Treasuries in a “flight-to-quality” episode. Partial anticipation of increased threat level announcements is stronger than the anticipation of announcements regarding the federal funds rate during the 10 days prior to an announcement.