The War Puzzle: Contradictory Effects of International Conflicts on Stock Markets

30 Pages Posted: 31 May 2011  

Amelie Brune

University of Zurich - Department of Banking and Finance

Thorsten Hens

University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute (Zurich Center)

Marc Oliver Rieger

University of Trier

Mei Wang

WHU - Otto Beisheim School of Management

Date Written: May 29, 2011

Abstract

We study a number of large international military conflicts since World War II where we establish a news analysis as a proxy for the estimated likelihood that the conflict 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 conflicts, war, stock market reaction, news analysis, behavioral finance

JEL Classification: G11, G14, G19

Suggested Citation

Brune, Amelie and Hens, Thorsten and Rieger, Marc Oliver and Wang, Mei, The War Puzzle: Contradictory Effects of International Conflicts on Stock Markets (May 29, 2011). Swiss Finance Institute Research Paper No. 11-21. Available at SSRN: https://ssrn.com/abstract=1855895 or http://dx.doi.org/10.2139/ssrn.1855895

Amelie Brune

University of Zurich - Department of Banking and Finance ( email )

Sch├Ânberggasse 1
Z├╝rich, 8001
Switzerland

Thorsten Hens (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 32
Zurich, 8032
Switzerland
+41-44 634 37 06 (Phone)

Norwegian School of Economics and Business Administration (NHH)

Helleveien 30
Bergen, 5045
Norway

Swiss Finance Institute (Zurich Center)

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Marc Oliver Rieger

University of Trier ( email )

15, Universitaetsring
Trier, 54286
Germany

HOME PAGE: http://www.banking-finance.uni-trier.de

Mei Wang

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallender, 56179
Germany

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