30 Pages Posted: 31 May 2011
Date Written: May 29, 2011
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: 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