DP17185 Proximity to War: The stock market response to the Russian invasion of Ukraine

Author(s): Jonathan Federle, André Meier, Gernot Müller, Victor Sehn
Publication Date: April 2022
Date Revised: June 2022
Keyword(s): International Conflicts, Military Spillovers, Neighbors, Proximity Penalty, Rare Disasters, Russia, Trade, Ukraine, war
JEL(s): F50, F51, G15
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17185

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.