The economic effects of violent conflict: evidence from asset market reactions

This article studies the effects of conflict onset on asset markets applying the event study methodology. The authors consider a sample of 101 internal and inter-state conflicts during the period 1974–2004 and find that a sizeable fraction of them has had a significant impact on stock market indices, exchange rates, oil and commodity prices. This fraction is inconsistent with pure chance, that is, with the selected probability of type-I errors in our tests of statistical significance. The results suggest that, on average, national stock markets are more likely to display positive than negative reactions to conflict onset. When the authors distinguish between internal and inter-state conflicts, they find that the fraction of significant results is higher for international conflicts. When the authors classify events according to the region where they occur, they find that Asia and the Middle East are the regions where conflicts tend to have the strongest effects. Finally, the article reports evidence that abnormal returns would have accrued to investors systematically exploiting conflict onset to implement conflict-driven strategies. Results are robust to selecting a subset of high-intensity conflicts and to expanding the time window over which conflict events are defined. The findings of the article confirm the economic importance of the effects of conflicts on asset markets.