Stock market response to war
In this paper, Federle et al. analyze the impact the Russian-Ukraine war had on the stock markets of countries close to Ukraine. They identify a “proximity penalty” in the stock market response to the Russian invasion of Ukraine. The authors find that the closer countries are to Ukraine, the lower their equity returns in a four-week window around the start of the war. Trade linkages explain two-thirds of the proximity penalty and the authors attribute the remainder—1.1 percentage points in equity returns per 1,000 kilometers of extra distance—to military disaster risk. In addition, Federle et al. present firm-level data, which show that individual companies headquartered closer to the war zone underperform in the stock market, even after controlling for various other factors.
Proximity to War: The Stock Market Response to the Russian Invasion of Ukraine
Authors: Jonathan Federle, André Meier, Gernot J. Müller, Victor Sehn
From: LMU Munich, Tudor Capital Europe LLP, University of Tübingen
Which countries pay the price of war?
This is the question that Federle et al. analyze in this paper. They use a state-of-the-art model of the global economy where they do not distinguish between belligerent countries and third countries. Instead, they model the war shock in the war site and let countries differ in their degree of trade integration with the war site. As the war destroys the productive capacity in the war-site economy, exports to nearby economies falter. This, in turn, induces a scarcity of intermediate inputs and induces a decline of the capital stock in the nearby country—even in the absence of any physical destruction of capital. The authors use a dataset spanning 150 years of data from more than 60 countries. They find:
- War on a country’s territory typically leads to an output decline of 30 percent and a 15 percentage point increase in inflation.
- There are also large negative effects for countries that are geographically close to the war site, irrespective of their participation in the war. Output in neighboring countries falls by more than 10 percent over 5 years, and inflation rises by 5 percentage points on average.
The Price of War
Authors: Jonathan Federle, André Meier, Gernot J. Müller, Willi Mutschler, Moritz Schularick
From: LMU Munich, Tudor Capital Europe LLP, University of Tübingen, Kiel Institute
