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Detecting Illegal Arms Trade

Author

Listed:
  • Stefano DellaVigna
  • Eliana La Ferrara

Abstract

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)

Suggested Citation

  • Stefano DellaVigna & Eliana La Ferrara, 2010. "Detecting Illegal Arms Trade," American Economic Journal: Economic Policy, American Economic Association, vol. 2(4), pages 26-57, November.
  • Handle: RePEc:aea:aejpol:v:2:y:2010:i:4:p:26-57
    Note: DOI: 10.1257/pol.2.4.26
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L64 - Industrial Organization - - Industry Studies: Manufacturing - - - Other Machinery; Business Equipment; Armaments

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