The War Puzzle: Contradictory Effects of International Conflicts on Stock Markets

We study a number of large international military conflicts sinceWorld War II where we establish a news analysis as a proxy for theestimated likelihood that the conflict will result in a war. We findthat in cases when there is a pre-war phase, an increase in the warlikelihood tends to decrease stock prices, but the ultimate outbreakof a war increases them. In cases when a war starts as a surprise, theoutbreak of a war decreases stock prices. We show that this paradoxcannot be explained by uncertainty about investment decisions, nor bythe expectation about a quick end of the war or ambiguity aversion. Aconnection of this puzzling phenomenon to mean-variance preferencesof investors is suggested.[...]