Working Paper: CEPR ID: DP17185
Authors: Jonathan Federle; Gernot Müller; André Meier; Victor Sehn
Abstract: The outbreak of a war exposes countries and firms in its proximity to the risk of military escalation. Disaster risk goes up and stock markets decline accordingly. In support of this hypothesis, we identify a "proximity penalty" in the stock market response to the Russian invasion of Ukraine. The closer countries and---even within countries---firms are located to Ukraine, the more negative their equity returns in a four-week window around the start of the war. Controlling for trade-related spillovers, 1,000 kilometers of extra distance equate to 1.1 percentage points in equity returns.
Keywords: rare disasters; proximity penalty; war; military spillovers; international conflicts; Russia; Ukraine; trade neighbors
JEL Codes: F50; F51; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Proximity to Ukraine (F55) | Stock market returns (G17) |
| Distance from Ukraine (R39) | Stock market returns (G17) |
| Proximity to Ukraine (F55) | Negative equity returns (G12) |
| Trade-related spillovers (F69) | Stock market returns (G17) |