The war puzzle: contradictory effects of international conflicts on stock markets

Amelie Brune, Thorsten Hens, Marc Olivier Rieger and Mei Wang
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Amelie Brune: University of Zurich
Thorsten Hens: Unviersity of Zurich and Swiss Finance Institute
Marc Olivier Rieger: University of Trier
Mei Wang: WHU Otto Beisheim School of Management

No 11-21, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study a number of large international military con flicts since World War II where we establish a news analysis as a proxy for the estimated likelihood that the con ict will result in a war. We find that in cases when there is a pre-war phase, an increase in the war likelihood tends to decrease stock prices, but the ultimate outbreak of a war increases them. In cases when a war starts as a surprise, the outbreak of a war decreases stock prices. We show that this paradox cannot be explained by uncertainty about investment decisions, nor by the expectation about a quick end of the war or ambiguity aversion. A connection of this puzzling phenomenon to mean-variance preferences of investors is suggested.

Keywords: International confl icts; war; stock market reaction; news analysis; behavioral finance. (search for similar items in EconPapers)
JEL-codes: G11 G14 G19 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2011-05
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1121

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