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


Brune, Amelie; Hens, Thorsten; Rieger, Marc Oliver; Wang, Mei (2011). The war puzzle: Contradictory effects of international conflicts on stock markets. NCCR FINRISK 688, University of Zurich.

Abstract

We study a number of large international military conflicts since World War II where we establish a news analysis as a proxy for the estimated likelihood that the conflict 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.

We study a number of large international military conflicts since World War II where we establish a news analysis as a proxy for the estimated likelihood that the conflict 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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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
JEL Classification:G11, G14, G19
Language:English
Date:2011
Deposited On:27 Sep 2011 09:18
Last Modified:05 Apr 2016 15:01
Series Name:NCCR FINRISK
Official URL:http://www.zora.uzh.ch/49787/
Related URLs:http://www.nccr-finrisk.uzh.ch/wps.php?action=query&id=688
Permanent URL: http://doi.org/10.5167/uzh-49787

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