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Investor behavior in times of conflict: A natural experiment on the interplay of geopolitical risk and defense stocks

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  • Klein, Tony

Abstract

We examine the connectedness of aerospace and defense companies and their relation to measures of geopolitical risk. With hierarchical clustering, we find stable and localized company clusters. Increasing geopolitical risk leaves these clusters intact but strengthens inter-cluster connectedness. Focusing on intraday data, we find that for most companies, instantaneous news arrival in form of jumps impacts realized volatility significantly. Further, we show that different measures of geopolitical uncertainty (GPR and COVOL) have differing impact on short-term predictions of intraday volatility, underlying the importance to distinguish between different sources of uncertainty. We provide evidence that investors react instantaneously to increases in geopolitical risk with some persistence of these shocks. The COVOL index holds significant informational content for short- and medium-term predictions of realized volatility of global aerospace and defense companies.

Suggested Citation

  • Klein, Tony, 2024. "Investor behavior in times of conflict: A natural experiment on the interplay of geopolitical risk and defense stocks," Journal of Economic Behavior & Organization, Elsevier, vol. 222(C), pages 294-313.
    • Handle: RePEc:eee:jeborg:v:222:y:2024:i:c:p:294-313
    DOI: 10.1016/j.jebo.2024.04.020
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    More about this item

    Keywords

    Geopolitical risk; War; Investor behavior; Sentiment; Clustering;
    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
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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