The shock of war: do trade relations impact the reaction of stock markets to the Russian invasion of Ukraine?

This paper assesses whether the strength of trade ties with Russia and Ukraine differentiates the reaction of stock markets to the outbreak of the Russian invasion of Ukraine on 24 February 2022. Both the G20 and the EU are studied. The focus is on the stock market index change on the first day of the invasion, and the stock market index change between 23 February and 7 March 2022, where 7 March refers to the highest level of stock market uncertainty following the outbreak of the conflict. We distinguish clusters representing countries with a similar share of trade with Russia and Ukraine and then, based on cluster data and the Kruskal-Wallis and Wilcoxon rank-sum pairwise comparison tests, assess whether there are significant differences in stock market reactions between selected groups of countries. We reveal that the level of a country’s trade links with the belligerents of the conflict significantly impacts changes in its stock market indices. Indices from those countries whose ties to Russia and Ukraine are strongest have decreased the most. This study therefore implies that the scale of economic relations between countries might play an important role in the magnitude of the stock market reaction to the outbreak of an international military conflict, particularly these days when financial markets are globally integrated.