How Do Stock Markets React to Wars?

How Do Stock Markets React to Wars?

In this episode, hosts Kate Holland and Veljko Fotak discuss how wars affect stock markets. Drawing on both existing academic research and historical records, Kate and Veljko discuss how markets tend to initially react negatively, with sharp declines, just as most of us would expect. But those initial sharp declines tend to be followed by “war rallies” and, overall, markets during wars display surprising low levels of volatility—what researchers call the “war volatility puzzle.” The episode includes discussions on winners and losers across sectors, flight to safety, currency markets, oil shocks, and a lot more fun and interesting stuff.

 

 

Timeline:

00:00 How Do Stock Markets React to Wars?

04:49 Welcome to Questions in Finance

08:18 The Real World

13:55 From Main Street to Wall Street

16:49 Rare Disaster Models

28:33 War Risk Is a Priced Factor

32:44 Market Timing

35:11 The Volatility Puzzle

39:40 Winners and Losers

50:11 Flight to Safety

56:32 Goodbye 

 

 

Bibliography:

Cortes, Gustavo S., Angela Vossmeyer, and Marc D. Weidenmier. “Stock volatility and the war puzzle: The military demand channel.” No. w29837. National Bureau of Economic Research, 2022.

Barro, Robert J. “Rare disasters and asset markets in the twentieth century.” The Quarterly Journal of Economics 121, no. 3 (2006): 823-866.

Barro, Robert J. “Rare disasters, asset prices, and welfare costs.” American Economic Review 99, no. 1 (2009): 243-264.

Berkman, Henk, Ben Jacobsen, and John B. Lee. “Time-varying rare disaster risk and stock returns.” Journal of Financial Economics 101, no. 2 (2011): 313-332.

Federle, Jonathan, André Meier, Gernot J. Müller, Willi Mutschler, and Moritz Schularick. “The price of war.” American Economic Review 116, no. 3 (2026): 791-827.

Guidolin, Massimo, and Eliana La Ferrara. “Diamonds are forever, wars are not: Is conflict bad for private firms?.” American Economic Review 97, no. 5 (2007): 1978-1993.

Hart, Oliver, David Thesmar, and Luigi Zingales. “Private sanctions.” Economic Policy 39, no. 117 (2024): 203-268.

Hirshleifer, David, Dat Mai, and Kuntara Pukthuanthong. “War discourse and the cross section of expected stock returns.” The Journal of Finance 80, no. 6 (2025): 3589-3637.

Hirshleifer, David, Dat Mai, and Kuntara Pukthuanthong. “War discourse and disaster premium: 160 years of evidence from the stock market.” The Review of Financial Studies 38, no. 2 (2025): 457-506.

Schwert, G. William. “Why does stock market volatility change over time?.” The Journal of Finance 44, no. 5 (1989): 1115-1153.

Taleb, Nassim N., “Fooled by randomness: The hidden role of chance in the markets and in life,” New York: Texere, 2001.

Tajaddini, Reza, and Hassan F. Gholipour. “Trade dependence and stock market reaction to the Russia‐Ukraine war.” International Review of Finance 23, no. 3 (2023): 680-691.

Wolfers, Justin, and Eric Zitzewitz. “Using markets to inform policy: The case of the Iraq war.” Economica 76, no. 302 (2009): 225-250.

 

 

Soundtrack:

The soundtrack is based on "Walk on a Funky Street" by MondayHopes. Thanks for the music and keep up the good work! Use is under the Pixabay Content License.