Information provided by the U.S. Department of Homeland Security regarding potential terrorist attacks significantly affects U.S. equities. When the government announces heightened terror alert levels, investors’ perceptions of risk increase as measured by both conditional volatility of equity returns and implied volatility on Standard &Poor’s 500 Index options. We also find evidence that informed traders are more active when there is an increased threat of an attack; however, equity market responses to these threat-related announcements have declined monotonically over time.
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