New research by a finance professor at Massey University may answer two key questions that have puzzled analysts and academics for decades.
No one has ever been able to fully explain why share market returns are much higher than other investments, and why market volatility is always much greater than it should be even when taking into account usual economic risks.
Professor Ben Jacobsen has analysed political crises over the last decade, and found that they do affect stock market returns.
Professor Jacobsen concludes that although the risks of such rare disasters like wars and epidemics are small, markets do take them into account.
He says it's the first time this theory has been confirmed using real-life events, and could change the study of financial markets in the future.
The paper has been accepted for publication in the Journal of Financial Economics, which Professor Jacobsen says is the academic equivalent of winning an Olympic medal.