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Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 1 The Financial and Economic Impact of September 11, 2001 Campbell R. Harvey Duke University,

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Presentation on theme: "Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 1 The Financial and Economic Impact of September 11, 2001 Campbell R. Harvey Duke University,"— Presentation transcript:

1 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 1 The Financial and Economic Impact of September 11, 2001 Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge, MA USA http://www.duke.edu/~charvey The Terrorism Crisis and the World Economy: What Effects, What Strategies? October 8, 2001 Duke University

2 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 2 1. Plan Economic impact Financial impact Determinants of risk

3 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 3 2. Economic impact U.S. annual real GDP growth before crisis: –2001Q2 +0.3% –2001Q3 -0.4% –2001Q4 +0.2% –2002Q1 +0.7% –2002Q2 +1.2% –2002Q3 +1.9% –2002Q4 +2.5%

4 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 4 2. Economic impact U.S. annual real GDP growth after crisis: –2001Q2 +0.3% –2001Q3 -0.8% –2001Q4 -2.0% –2002Q1 -0.7% –2002Q2 -0.2% –2002Q3 +1.0% –2002Q4 +2.8%

5 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 5 2. Economic impact $165 billion loss

6 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 6 2. Economic impact Accounting: Income –U.S. GDP $165 billion –Other countries GDP $250 billion –Total = $415 billion (conservative)

7 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 7 3. Financial impact Accounting: Value –$40 billion in U.S. physical assets –Loss in equity value far greater

8 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 8 3. Financial impact

9 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 9 3. Financial impact Loss of $541 billion

10 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 10 3. Financial impact Understanding stock market reaction –Long-term growth decreases –Risk premium increases Current assets worth less Less investment in new projects

11 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 11 3. Financial impact Understanding stock market reaction Simple model   dividend yield =  required return -  growth 0.17 = 0.07 - -0.10

12 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 12 3. Financial impact Risk premium –Graham-Harvey survey of CFOs was running during the crisis –Before and after crisis comparison

13 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 13 3. Financial impact Risk premium –10-year risk premium dramatically increases across pre-post samples –Compared to average of last six quarters, increases by 0.47% after crisis –Comparing Sept. 10 to Sept. 12, 3.5% vs 4.8% 1.3% increase in risk premium!

14 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 14 3. Financial impact Risk premium –holding everything else equal, a 1.3% increase would imply a huge loss in stock market value –but interest rates also decreased

15 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 15

16 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 16 3. Financial impact

17 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 17 3. Financial impact

18 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 18 3. Financial impact What is the interpretation? –While interest rates have gone down, risk premium has increased by more - hence, lower stock market valuations

19 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 19 3. Financial impact Why does risk premium increase? –Market volatility as measured by “disagreement” increases (which should increase the premium) –Fundamental risk has increased

20 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 20 Lower rating (higher risk) commands higher expected returns. 3. Financial impact

21 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 21 3. Financial impact World economic linkages –World economy is critically linked to health of the U.S. economy

22 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 22 3. Financial impact Average Monthly Returns in % Data through Sept 2001

23 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 23 3. Financial impact Average Monthly Standard Deviation of Returns in % Data through Sept 2001

24 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 24 3. Financial impact Correlation of Returns with World Data through Sept 2001

25 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 25 3. Financial impact Covariance of Returns with World Data through Sept 2001

26 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 26 3. Financial impact Source: MSCI Change in Market Capitalization: August vs. September 2001

27 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 27 3. Financial impact Value destroyed –More than $1.5 trillion –Does not include human life

28 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 28 4. Comparison Afganistan’s GDP –approximately $20 billion –($227 per capita)

29 Copyright 2001. Campbell R. Harvey. All Worldwide Rights Reserved. 29 5. Conclusions September 11, 2001 1. $300 billion in income over the next year wiped out 2. $1.5 trillion in value destroyed

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