Gains from Gunboats: U.S. Aircraft Carriers and Financial Markets in East Asia

Abstract

Asia, in particular East Asia and the South China Sea, is one of the regions that are particularly exposed to geopolitical risk. We study the impact of an increased presence of the U.S. military in Asia on asset prices and capital inflows in the region. For that purpose, we construct a novel index from local newspapers reporting on the presence of U.S. Carrier Strike Groups in the region and estimate the market impact of a surprise change in this index. Our findings reveal that a higher military presence causes an increase in stock prices, an appreciation of the local currency, and an inflow of foreign capital, but also a higher level of geopolitical risk. Interestingly, during the first Trump administration, some effects change the sign. We also distinguish between newspapers reporting on the deployments of U.S. aircraft carriers related to tensions with North Korea and those related to tensions with China.

Keywords: Geopolitical risk, U.S. military presence, China, financial markets, Asia JEL codes: F51, E44, F21