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

47 Pages Posted: 27 May 2022 Last revised: 23 Jun 2022

See all articles by Jonathan Federle

Jonathan Federle

Kiel Institute for the World Economy

Gernot J. Müller

University of Tuebingen - Department of Economics

André Meier

European University Institute

Victor Sehn

LMU Munich School of Management

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Date Written: April 2022

Abstract

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: International Conflicts, Military Spillovers, Neighbors, Proximity Penalty, Rare Disasters, Russia, Trade, Ukraine, war

JEL Classification: F50, F51, G15

Suggested Citation

Federle, Jonathan and Müller, Gernot J. and Meier, André and Sehn, Victor, Proximity to War: The Stock Market Response to the Russian Invasion of Ukraine (April 2022). CEPR Discussion Paper No. DP17185, Available at SSRN: https://ssrn.com/abstract=4121360

Jonathan Federle (Contact Author)

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

André Meier

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Victor Sehn

LMU Munich School of Management ( email )

Institute of Accounting, Auditing and Analysis
Ludwigstr. 28 RG
Munich, 80539
Germany

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