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Detecting Illegal Arms Trade

  • Stefano DellaVigna
  • Eliana La Ferrara

We propose a method to detect illegal arms trade based on investor knowledge. We focus on countries under arms embargo and identify events that suddenly increase or decrease conflict intensity. If a weapon-making company is trading illegally, an event that increases the demand for arms may increase stock prices. We find positive event returns for companies headquartered in countries with high corruption and low transparency in arms trade. We also suggest a method to detect potential embargo violations based on chains of reactions by individual stocks. The presumed violations positively correlate with the number of UN investigations and Internet stories. (JEL D74, F13, G14, K42, L64)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.2.4.26
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Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 2 (2010)
Issue (Month): 4 (November)
Pages: 26-57

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Handle: RePEc:aea:aejpol:v:2:y:2010:i:4:p:26-57
Note: DOI: 10.1257/pol.2.4.26
Contact details of provider: Web page: https://www.aeaweb.org/aej-policyEmail:


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  1. Maloney, Michael T. & Mulherin, J. Harold, 2003. "The complexity of price discovery in an efficient market: the stock market reaction to the Challenger crash," Journal of Corporate Finance, Elsevier, vol. 9(4), pages 453-479, September.
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  13. Justin Marion & Erich Muehlegger, 2008. "Measuring Illegal Activity and the Effects of Regulatory Innovation: Tax Evasion and the Dyeing of Untaxed Diesel," Journal of Political Economy, University of Chicago Press, vol. 116(4), pages 633-666, 08.
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