War, Peace and Stock Markets

35 Pages Posted: 27 Oct 2005

See all articles by Henk Berkman

Henk Berkman

University of Auckland - Business School

Ben Jacobsen

Tilburg University - TIAS School for Business and Society; Massey University

Date Written: February 2006


Using a database of 440 international political crises over the period 1918-2002, we find that international crises reduce world market stock returns by approximately four percent per annum. Crises cause large negative stock market reactions in their first month, lower than average returns during the remaining months, and a partial recovery when they end. International crises not only have a strong impact on mean returns but also on volatility. The start of an average crisis increases monthly world market volatility by more than a third and the end of a crisis decreases volatility by slightly less than a third. Daily US stock market returns confirm our results. We also find that stock market reactions and volatility changes are significantly stronger when an international crisis starts with violence, involves more severe value threats, or when a major power is involved on both sides of a conflict. Financial consequences for investors in crisis actor countries are even more devastating.

Keywords: War, Peace, Volatility Puzzle, Stock Returns, International Crises

JEL Classification: D6, E3, E6, F1, F2, F3, G1, N2

Suggested Citation

Berkman, Henk and Jacobsen, Ben, War, Peace and Stock Markets (February 2006). EFA 2006 Zurich Meetings, Available at SSRN: https://ssrn.com/abstract=885980 or http://dx.doi.org/10.2139/ssrn.885980

Henk Berkman

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

Ben Jacobsen (Contact Author)

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB

Massey University ( email )

New Zealand

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