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Bin Laden Death Has Little Effect on Wall Street

Wall Street’s response to the killing of the al-Qaida leader was muted, as in “the markets didn’t give a damn.” Nor did they care about Pearl Harbor, the Korean War or even President Kennedy’s assassination. –YL

MarketWatch:

Surprised by the stock market’s muted reaction to news of Osama Bin Laden’s death?

You shouldn’t be.

Consider a comprehensive analysis of the impact on the market of non-economic events. Despite being 20 years old, the study remains one of the standard academic works on the subject. (It was conducted by economics professors James Poterba of MIT and David Cutler and Lawrence Summers of Harvard.)

The professors designed their study to find evidence that non-economic news such as bin Laden’s has a big impact on stocks. They focused on all entries in the “Chronology of Important World Events” from the World Almanac for the period beginning with Pearl Harbor and ending with the 1987 Crash, and then eliminated from their list any events that the New York Times did not carry as a lead story and that the Times’ Business Section did not report as having affected investors.

The result was a list of 49 distinct events, such as Pearl Harbor, the Korean War, Kennedy’s assassination, and so forth. The professors then measured the average absolute return of the S&P 500 index on these days.

The professors came up with little evidence that non-economics events had a big effect on the stock market.

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