Proximity to War: The Stock Market Response to the Russian Invasion of Ukraine

The outbreak of a war exposes countries and firms in its proximity to the risk of military escalation. Disaster risk goes up and stock markets decline accordingly. In support of this hypothesis, we identify a "proximity penalty" in the stock market response to the Russian invasion of Ukraine. The closer countries and---even within countries---firms are located to Ukraine, the more negative their equity returns in a four-week window around the start of the war. Controlling for trade-related spillovers, 1,000 kilometers of extra distance equate to 1.1 percentage points in equity returns.

Keywords: Rare disasters, Proximity Penalty, War, Military Spillovers, International Conflicts, Russia, Ukraine, Trade, Neighbors

JEL Classification: F50, F51, G15

Suggested Citation: Suggested Citation

Federle, Jonathan and Meier, Andre and Müller, Gernot J. and Sehn, Victor, Proximity to War: The Stock Market Response to the Russian Invasion of Ukraine (May 31, 2022). CEPR Discussion Paper No. DP17185, Available at SSRN: https://ssrn.com/abstract=4060222 or http://dx.doi.org/10.2139/ssrn.4060222