Investor behavior in times of conflict: A natural experiment on the interplay of geopolitical risk and defense stocks
We examine the connectedness of aerospace and defense companies and their relation to measures of geopolitical risk. With hierarchical clustering, we find stable and localized company clusters. Increasing geopolitical risk leaves these clusters intact but strengthens inter-cluster connectedness. Foc...
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| Published in | Journal of economic behavior & organization Vol. 222; pp. 294 - 313 |
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| Main Author | |
| Format | Journal Article |
| Language | English |
| Published |
Elsevier B.V
01.06.2024
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| Subjects | |
| Online Access | Get full text |
| ISSN | 0167-2681 1879-1751 |
| DOI | 10.1016/j.jebo.2024.04.020 |
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| Abstract | We examine the connectedness of aerospace and defense companies and their relation to measures of geopolitical risk. With hierarchical clustering, we find stable and localized company clusters. Increasing geopolitical risk leaves these clusters intact but strengthens inter-cluster connectedness. Focusing on intraday data, we find that for most companies, instantaneous news arrival in form of jumps impacts realized volatility significantly. Further, we show that different measures of geopolitical uncertainty (GPR and COVOL) have differing impact on short-term predictions of intraday volatility, underlying the importance to distinguish between different sources of uncertainty. We provide evidence that investors react instantaneously to increases in geopolitical risk with some persistence of these shocks. The COVOL index holds significant informational content for short- and medium-term predictions of realized volatility of global aerospace and defense companies.
•Aerospace and defense companies form localized clusters.•Increasing geopolitical risk increases the intercluster connectedness.•Different measures of geopolitical risks (GPR and COVOL) affect realized volatility predictions.•Instantaneous news arrival in form of volatility jumps are causally related to changes in geopolitical risk.•We provide evidence that investors react instantaneously to increases in geopolitical risk. |
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| AbstractList | We examine the connectedness of aerospace and defense companies and their relation to measures of geopolitical risk. With hierarchical clustering, we find stable and localized company clusters. Increasing geopolitical risk leaves these clusters intact but strengthens inter-cluster connectedness. Focusing on intraday data, we find that for most companies, instantaneous news arrival in form of jumps impacts realized volatility significantly. Further, we show that different measures of geopolitical uncertainty (GPR and COVOL) have differing impact on short-term predictions of intraday volatility, underlying the importance to distinguish between different sources of uncertainty. We provide evidence that investors react instantaneously to increases in geopolitical risk with some persistence of these shocks. The COVOL index holds significant informational content for short- and medium-term predictions of realized volatility of global aerospace and defense companies.
•Aerospace and defense companies form localized clusters.•Increasing geopolitical risk increases the intercluster connectedness.•Different measures of geopolitical risks (GPR and COVOL) affect realized volatility predictions.•Instantaneous news arrival in form of volatility jumps are causally related to changes in geopolitical risk.•We provide evidence that investors react instantaneously to increases in geopolitical risk. |
| Author | Klein, Tony |
| Author_xml | – sequence: 1 givenname: Tony orcidid: 0000-0003-4568-8753 surname: Klein fullname: Klein, Tony email: tony.klein@wiwi.tu-chemnitz.de organization: Faculty of Business and Economics, Technische Universität Chemnitz, Germany |
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| CitedBy_id | crossref_primary_10_1016_j_econlet_2024_112005 crossref_primary_10_1016_j_jebo_2024_106860 crossref_primary_10_1016_j_eneco_2024_108112 crossref_primary_10_1016_j_eneco_2024_108055 crossref_primary_10_2139_ssrn_4916198 crossref_primary_10_1016_j_heliyon_2024_e40974 crossref_primary_10_1016_j_frl_2024_106191 crossref_primary_10_1371_journal_pone_0312155 |
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| Keywords | F51 Geopolitical risk G41 G11 War G14 Investor behavior Clustering Sentiment |
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| SubjectTerms | Clustering Geopolitical risk Investor behavior Sentiment War |
| Title | Investor behavior in times of conflict: A natural experiment on the interplay of geopolitical risk and defense stocks |
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