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Diversifying away the risk of war and cross-border political crisis

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  • Omar, Ayman M.A.
  • Wisniewski, Tomasz Piotr
  • Nolte, Sandra

Abstract

This paper investigates the behavior of crude oil prices, government bonds, and stock market indices around outbreaks of severe international crises and wars. Using a constant mean return event study, we show that these events are associated with positive and significant abnormal returns on oil and bonds, which means that these two asset classes can potentially shelter shareholders from plummeting equity values during international crises. A formal safe haven analysis confirms this insight. Such price movements may reflect a reallocation of funds across asset classes in response to the events, as well as shifts in the demand for oil due to precautionary, speculative, and military motives. We also calculate the weights for optimal portfolios, which could provide insurance against conflict risk.

Suggested Citation

  • Omar, Ayman M.A. & Wisniewski, Tomasz Piotr & Nolte, Sandra, 2017. "Diversifying away the risk of war and cross-border political crisis," Energy Economics, Elsevier, vol. 64(C), pages 494-510.
  • Handle: RePEc:eee:eneeco:v:64:y:2017:i:c:p:494-510
    DOI: 10.1016/j.eneco.2016.02.015
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    Keywords

    Crude oil price; Safe haven; International crises; Wars;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q34 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Natural Resources and Domestic and International Conflicts

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