The Repercussions of War Risks

Abstract

I study the effects of the Russo-Ukrainian war on global financial markets of 87 developed and emerging economies. The methodology builds on Rigobon and Sack (2004) that focus on the shift in volatility on days of intense war news. I find that war risk caused considerable decline in asset prices, heightened stress in the financial system, and spike in commodity prices. However, the long-term risk-free rates remain anchored, suggesting that flight-to-safety behaviour was contained and had not morphed into an exodus of capital outflows towards the safest assets in the US. Over time, I find that the effects of a single, one-off war shock are transitory, peaking in about 15 days and dissipating within the month. This clarifies that the lasting impact of the war in the real world is attributable to a stream of war shocks rather than a persistent, singular shock. In a state-dependent model, I find that nations that share borders and have strong trade ties with the belligerents and NATO member states are more affected by war shocks. In contrast, financial markets of advanced and emerging economies do not exhibit significant differences. These results may inform strategies of nations and shape future outcomes. Show more