Hostname: page-component-586b7cd67f-vdxz6 Total loading time: 0 Render date: 2024-11-24T21:54:33.508Z Has data issue: false hasContentIssue false
  • English
  • Français

The Arab Spring and the International Defense Market

Published online by Cambridge University Press:  29 October 2020

Jeroen Klomp Open the ORCID record for Jeroen Klomp [Opens in a new window]
Jeroen Klomp*
Affiliation:
Netherlands Defence Academy, Faculty of Military Sciences, The Netherlands
*
Corresponding author: Jeroen Klomp, Email: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

The aim of this study is to analyze the impact of the political violence during the Arab Spring on the stock market return of international defense firms. The direction of this impact is not directly straightforward as the civil unrests influence the expectations of investors in two opposite ways. On the one hand, investors might expect that when the peaceful demonstrations were turned into violent events, the Arab governments involved will start acquiring more military-strategic goods to repress the protests or send a strong signal of power to ensure their stay in office. However, on the other hand, when the popular protests escalated, investors, perhaps, became more concerned about the possible imposition of international military sanctions against the Arab Spring countries to restore peace and protect human rights. The main empirical findings of a dynamic panel model clearly confirm this pattern and point out that when the Arab Spring originated, the abnormal return of international defense stocks starts to rise immediately. However, in the course of time, the concerns of the introduction of arms embargoes become stronger and eventually start to dominate, causing the abnormal return to fall again, while the idiosyncratic risk began to fall due to enhanced diversification. It turns out that firm-specific factors can explain a substantial part of the effect found. For instance, the reaction of investors to the Arab Spring is significantly larger for firms that produce predominantly military goods.

Keywords

Arab Springdefense industryabnormal return
Type
Research Article
Information
Business and Politics , Volume 23 , Issue 2 , June 2021 , pp. 202 - 220
Copyright
Copyright © The Author(s), 2020. Published by Cambridge University Press on behalf of V.K. Aggarwal

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Akerman, A., and Seim, A.. 2014. “The global arms trade network 1950–2007.” Journal of Comparative Economics 42: 535–51.CrossRefGoogle Scholar
Ang, A., Hodrick, R. J., Xing, Y., and Zhang, X.. 2009. “High idiosyncratic volatility and low returns: International and further US evidence.” Journal of Financial Economics 91: 1–23.CrossRefGoogle Scholar
Apergis, E., and Apergis, N.. 2016. “The 11/13 Paris terrorist attacks and stock prices: The case of the international defense industry.” Finance Research Letters 17: 186–92.CrossRefGoogle Scholar
Apergis, N., Bonato, M., Gupta, R., and Kyei, C.. 2018. “Does geopolitical risks predict stock returns and volatility of leading defense companies? Evidence from a nonparametric approach.” Defense and Peace Economics 29: 684–96.Google Scholar
Berrebi, C., and Klor, E.. 2005. The impact of terrorism across industries: An empirical study. New York: Mimeo.Google Scholar
Black, F., and Scholes, M.. 1973. “The pricing of options and corporate liabilities.” Journal of Political Economy 81 (3): 637–54.CrossRefGoogle Scholar
Boogaerts, A., Portela, C., and Drieskens, E.. 2016. “One Swallow Does Not Make Spring: A Critical Juncture Perspective on the EU Sanctions in Response to the Arab Spring.” Mediterranean Politics 21 (2): 205–25.CrossRefGoogle Scholar
Bouri, E., Demirer, R., Gupta, R., and Marfatia, H. A.. 2019. “Geopolitical risks and movements in Islamic bond and equity markets: A note.” Defense and Peace Economics 30: 367–79.CrossRefGoogle Scholar
Brounen, D., and Derwall, J.. 2010. “The impact of terrorist attacks on international stock markets.” European Financial Management 16: 585–98.CrossRefGoogle Scholar
Caldara, D., and Iacoviello, M.. 2018. “Measuring geopolitical risk.” FRB International Finance Discussion Paper 1222. Federal Rerserve.CrossRefGoogle Scholar
Capelle-Blancard, G., and Couder, N.. 2008. “What drives the market value of firms in the defense industry?” Review of Financial Economics 17: 14–32.CrossRefGoogle Scholar
Charles, A., and Darné, O.. 2006. “Large shocks and the September 11th terrorist attacks on international stock markets.” Economic Modelling 23 (4): 683–98.CrossRefGoogle Scholar
Chau, F., Deesomsak, R., and Wang, J.. 2014. “Political uncertainty and stock market volatility in the Middle East and North African (MENA) countries.” Journal of International Financial Markets, Institutions and Money 28: 1–19.CrossRefGoogle Scholar
Chen, Z., and Petkova, R.. 2012. “Does idiosyncratic volatility proxy for risk exposure?” The Review of Financial Studies 25: 2745–87.CrossRefGoogle Scholar
Chen, A., and Siems, T.. 2004. “The effects of terrorism on global capital markets.” European Journal of Political Economy 20: 349–66.CrossRefGoogle Scholar
Ciner, C., Gurdgiev, C., and Lucey, B.. 2013. “Hedges and safe havens: An examination of stocks, bonds, gold, oil and exchange rates.” International Review of Financial Analysis 29: 202–11.CrossRefGoogle Scholar
Collier, P., and Hoeffler, A.. 2007. “Military spending and the risks of coups d'etat”. Working Paper. Department of Economics, University of Oxford.Google Scholar
Deger, S., and Sen, S.. 1995. “Military expenditure and developing countries.” Handbook of Defense Economics 1: 275–307.CrossRefGoogle Scholar
DellaVigna, S., and La Ferrara, E.. 2010. “Detecting illegal arms trade.” American Economic Journal: Economic Policy 2: 26–57.Google Scholar
Dickey, D., and Fuller, W.. 1981. “Likelihood ratio statistics for autoregressive time series with a unit root.” Econometrica 49: 1057–72.CrossRefGoogle Scholar
Doms, M. E., and Morin, N. J.. 2004. “Consumer sentiment, the economy, and the news media.” FRB of San Francisco Working Paper 2004–09.Google Scholar
Dreger, C., Kholodilin, K., Ulbricht, D., and Fidrmuc, J.. 2016. “Between the hammer and the anvil: The impact of economic sanctions and oil prices on Russia's ruble.” Journal of Comparative Economics 44: 295–308.CrossRefGoogle Scholar
Dunne, J. P., and Mohammed, N. A.. 1995. “Military spending in sub-Saharan Africa: Some evidence for 1967–85.” Journal of Peace Research 32: 331–43.CrossRefGoogle Scholar
Erickson, J. L. 2013. “Stopping the legal flow of weapons: Compliance with arms embargoes, 1981–2004.” Journal of Peace Research 50: 159–74.CrossRefGoogle Scholar
Fu, F. 2009. “Idiosyncratic risk and the cross-section of expected stock returns.” Journal of Financial Economics 91: 24–37.CrossRefGoogle Scholar
Hoffmann, M., and Neuenkirch, M.. 2017. “The pro-Russian conflict and its impact on stock returns in Russia and the Ukraine.” International Economics and Economic Policy 14: 61–73.CrossRefGoogle Scholar
Hsiao, C., Lahiri, K., Lee, L., and Pesaran, M.. 1999. Analysis of Panels and Limited Dependent Variable Models. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Im, K. S., Pesaran, M., and Shin, Y.. 2003. “Testing for unit roots in heterogeneous panels.” Journal of Econometrics 115: 53–74.CrossRefGoogle Scholar
Karolyi, A., and Martell, R.. 2010. “Terrorism and the Stock Market.” International Review of Applied Financial Issues and Economics 2: 285–314.Google Scholar
Kis-Katos, K., Liebert, H., and Schulze, G. G.. 2011. “On the origin of domestic and international terrorism.” European Journal of Political Economy 27: 17–36.CrossRefGoogle Scholar
Klomp, J. 2019a. Killing Khashoggi a done deal? New York: Mimeo.Google Scholar
Klomp, J. 2019b. Business performance and arms embargoes: An empirical analysis of the international defense industry. New York: Mimeo.Google Scholar
Kollias, C., Kyrtsou, C., and Papadamou, S.. 2013. “The Effects of Terrorism and War on the Oil Price–stock Index Relationship.” Energy Economics 40: 743–52.CrossRefGoogle Scholar
Kollias, C., Papadamou, S., and Stagiannis, A.. 2010. “Armed Conflicts and Capital Markets: The Case of the Israeli Military Offensive in the Gaza Strip.” Defense and Peace Economics 21: 357–65.CrossRefGoogle Scholar
Kollias, C., Papadamou, S., and Stagiannis, A.. 2011a. “Terrorism and Capital Markets: The Effects of the Madrid and London Bomb Attacks.” International Review of Economics and Finance 20: 532–41.CrossRefGoogle Scholar
Kollias, C., Papadamou, S., and Stagiannis, A.. 2011b. “Stock Markets and Terrorist Attacks: Comparative Evidence from a Large and a Small Capitalization Market.” European Journal of Political Economy 27: 64–77.CrossRefGoogle Scholar
Liu, L., Shu, H., and Wei, K.. 2017. “The impacts of political uncertainty on asset prices: Evidence from the Bo scandal in China.” Journal of Financial Economics 125: 286–310.CrossRefGoogle Scholar
Maghyereh, A., and Al-Kandari, A.. 2007. “Oil prices and stock markets in GCC countries: new evidence from nonlinear cointegration analysis.” Managerial Finance 33: 449–60.CrossRefGoogle Scholar
Maisels, A., and Nissanke, M.. 1986. “The determinants of military expenditures in developing countries.” World Development 14: 1125–40.CrossRefGoogle Scholar
Markusen, J., and Venables, A.. 1998. “Multinational firms and the new trade theory.” Journal of International Economics 46: 183–203.CrossRefGoogle Scholar
McDonald, J., and Kendall, W.. 1994. “Measuring the economic effects of political events: War and the US defense industry.” Journal of Applied Business Research 10: 57.CrossRefGoogle Scholar
Merton, R. 1973. “An intertemporal capital asset pricing model.” Econometrica 41: 867–87.CrossRefGoogle Scholar
Merton, R. C. 1987. “A Simple Model of Capital Market Equilibrium with Incomplete Information.” The Journal of Finance 42 (3): 483–510.CrossRefGoogle Scholar
Mohanty, S. K., Nandha, M., Turkistani, A. Q., and Alaitani, M. Y.. 2011. “Oil price movements and stock market returns: Evidence from Gulf Cooperation Council (GCC) countries.” Global Finance Journal 22 (1): 42–55.CrossRefGoogle Scholar
Noguera-Santaella, J. 2016. “Geopolitics and the oil price.” Economic Modelling 52: 301–09.CrossRefGoogle Scholar
Pedroni, P. 1999. “Critical values for cointegration tests in heterogeneous panels with multiple regressors.” Oxford Bulletin of Economics and Statistics 61: 653–70.CrossRefGoogle Scholar
Pesaran, M. H., Shin, Y., and Smith, R. J.. 1996. Testing for the Existence of a Long-run Relationship. Working Paper No. 9622. Faculty of Economics, University of Cambridge.Google Scholar
Pesaran, H., and Shin, Y.. 1998. “Generalized impulse response analysis in linear multivariate models.” Economics Letters 58: 17–29.CrossRefGoogle Scholar
Pesaran, M., and Yamagata, T.. 2008. “Testing slope homogeneity in large panels.” Journal of Econometrics 142: 50–93.CrossRefGoogle Scholar
Pesaran, M., Shin, Y., and Smith, R.. 1999. “Pooled mean group estimation of dynamic heterogeneous panels.” Journal of the American Statistical Association 94: 621–34.CrossRefGoogle Scholar
Prabhat, S., and Primo, D.. 2019. “Risky business: Do disclosure and shareholder approval of corporate political contributions affect firm performance?” Business and Politics 21: 205–39.CrossRefGoogle Scholar
Salisbury, D. 2013. “Trade controls and non-proliferation: compliance costs, drivers and challenges.” Business and Politics 15: 529–51.CrossRefGoogle Scholar
Tanyeri, A. 2018. Financial Consequences of Political Uncertainty: The Arab Spring. New York: Mimeo.Google Scholar
Tierney, D. 2005. “Irrelevant or malevolent? UN arms embargoes in civil wars.” Review of International Studies 31: 645–64.CrossRefGoogle Scholar
Wezeman, S. 2014. “The global arms trade after the Cold War.” In The Global Arms Trade, 193–207. New York: Routledge.CrossRefGoogle Scholar
Supplementary material: File

Klomp supplementary material

Online Appendix

Download Klomp supplementary material(File)
File 39.2 KB