The impact of major conflicts on the stock performance of defense sector companies

Abstract

This master thesis explores the impact of major geopolitical conflicts on the stock performance of defense companies. With increasing global military hostilities, it is crucial to examine the behavior of defense companies during conflicts.

Relying on a weekly database from October 1990 to January 2025, this study analyzes the impact on 70 firms grouped into six portfolios. The methodology extends the Fama-French five-factor model by adding geopolitical variables such as the Geopolitical Risk Index (GPR), conflict intensity, dura-tion, type and location.

Eight hypotheses are tested to assess whether geopolitical factors enhance the explanatory value and whether the coefficients are statistically significant. The results show that traditional factors capture a large part of the variation. However, specific conflicts and other variables do not signifi-cantly enhance the model’s explanatory power and may even reduce its explanatory fit.

This thesis takes a long-term perspective, considering not just immediate shocks but also ongoing conflicts. It provides insights for portfolio managers and investors by identifying the effects of geo-political variables that are priced. The findings are not in line with the common perception that defense stocks systematically outperform during wars. Indeed, markets anticipate and traditional factors already price geopolitical variables.

The study investigates the link between geopolitical risk and financial performance. It offers a data-driven understanding of how markets react to uncertainty and wars. However, there are some limits, like potential survivorship bias and the difficulty of isolating conflict effects from other mac-roeconomic variables. To enhance the study, future research could use event studies or integrate firm-level data.