Even before the United States went to war against Iraq, the threat of conflict had drained $1.1 trillion from the value of the US stock market, according to a study.
The research, which was released as the market posted its biggest single-week gain since the jump that followed the September 11 hijacking attacks, tracked the performance of a novel financial instrument called the "Saddam Security", essentially a bet that the Iraqi leader will be deposed.
The researchers at Stanford University and Harvard University looked at how much value the US stock market lost as online bets increased that the United States would go to war to oust Saddam Hussein.
While the S&P 500 index rallied 7.5 per cent last week in anticipation of a swift conclusion to the war, the rising probability of a conflict had already knocked 15 per cent off where the stock market would have been if the United States had not taken on Iraq, the study said.
Most of those losses came in shares of consumer goods companies, airlines and technology companies and those relying on discretionary spending, researchers said.
"All the news has been about timing," said Eric Zitzewitz, an assistant professor of economics at Stanford's School of Business who coauthored the study. "The cost of war was priced in a while ago."
To assess the impact of war jitters on the market, the researchers tracked an online bet offered by a Tradesports, an internet-based "betting exchange" based in Ireland.
Since September of last year, Tradesports (www.tradesports.com) had been offering a financial instrument that pays $10 per share if the Iraqi leader is ousted by a certain date.
The trading in those "Saddam Securities" provides a proxy for how the market saw the probability of concluding a war ending in Mr Hussein's ouster, the researchers said.
For instance, the March "Saddam Security" last traded at $7.80, implying a 78 per cent chance Mr Hussein will be ousted by end-month. That was up from a previous close of 65 per cent and up sharply from 17 per cent earlier this month.
The researchers then correlated that record of market-based probability to changes in oil and stock prices and related futures and options to see how markets have reacted to the war risk, the researchers said.
"A lot of experts have looked at the budgetary costs of the war," Mr Zitzewitz said. "We thought that was only looking at the tip of the iceberg. We wanted to look at the effect on financial assets."
Other experts have estimated that the direct cost of a US war to the government would be between $22 billion and $140 billion, depending on how long the conflict runs and how willing the United States is to fund Iraq's reconstruction.
Meanwhile, the stock market has priced in a 70 per cent probability that the eventual impact of the war on the market will lead to a decline of zero to 15 per cent and a 20 per cent chance of a 15 to 30 percent dip, the study said.
The worst-case scenario was what the researchers said was a small but significant 10 per cent probability of a steep plunge of more than 30 per cent.