Smoke on the Market: Inattentive Investors and the War in Ukraine
46 Pages Posted: 13 May 2020
Date Written: April 17, 2020
This paper confronts predictions of rational choice, gain-loss, and inattention theories in the context of financial markets during war in Ukraine. Using various measures of conflict intensity as an explanatory variable, the paper finds that the Ukrainian stock market a) did not use all available information, b) reacted non-linearly in parameters with where regime 1 being characterized by a negative reaction and regime 2 characterized by ignorance. The paper also finds heterogeneous effects with respect to geographical location of the enterprises: a negative effect for enterprises with located in close proximity to the conflict events and a positive effect for the ones located elsewhere.
The author argues that the first finding is only compatible with the inattention framework, and suggests that the second one is driven by the portfolio re-balancing effect.
Keywords: Costs of War, Markov-Switching Auto-regression, Inattention Theory, Ukraine Crisis, Behavioral Finance
JEL Classification: D74, E22, F51, G10
Suggested Citation: Suggested Citation