Geopolitical Risk and Market Value of Defence Stocks

Abstract

This study examines if geopolitical risk and uncertainty has an effect on the market value of North American and European publicly listed defence firms. Through the use of an event study methodology we construct an equally weighted defence portfolio. Later on we calculate abnormal returns by using the actual return and expected return derived from the market model. The event study is based on 24 major events from 00 until 26 which are categorised into four categories; Conflict/Escalation, Defence Policy events, Terror Attacks and Placebo events. Our results conclude that defence firms can generate positive abnormal returns during times of heightened geopolitical risk. However, the effect differs depending on the event category. We find that Defence Policy events generate the highest positive abnormal return. Hence, this thesis suggests that defence stocks can benefit from geopolitical risk associated with future defence spending expectations.