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The war puzzle: contradictory effects of international conflicts on stock markets

  • Amelie BRUNE

    (University of Zurich)

  • Thorsten HENS

    (Unviersity of Zurich and Swiss Finance Institute)

  • Marc Olivier RIEGER

    (University of Trier)

  • Mei WANG

    (WHU Otto Beisheim School of Management)

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    We study a number of large international military con flicts since World War II where we establish a news analysis as a proxy for the estimated likelihood that the con ict will result in a war. We find that in cases when there is a pre-war phase, an increase in the war likelihood tends to decrease stock prices, but the ultimate outbreak of a war increases them. In cases when a war starts as a surprise, the outbreak of a war decreases stock prices. We show that this paradox cannot be explained by uncertainty about investment decisions, nor by the expectation about a quick end of the war or ambiguity aversion. A connection of this puzzling phenomenon to mean-variance preferences of investors is suggested.

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    Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 11-21.

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    Length: 30 pages
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    Handle: RePEc:chf:rpseri:rp1121
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