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

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Amelie BRUNE & Thorsten HENS & Marc Olivier RIEGER & Mei WANG, 2011. "The war puzzle: contradictory effects of international conflicts on stock markets," Swiss Finance Institute Research Paper Series 11-21, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp1121
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    More about this item

    Keywords

    International confl icts; war; stock market reaction; news analysis; behavioral finance.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other

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