War and stock markets: the effect of World War Two on the British stock market

Hudson, R. and Urquhart, A. ORCID: https://orcid.org/0000-0001-8834-4243 (2015) War and stock markets: the effect of World War Two on the British stock market. International Review of Financial Analysis, 40. pp. 166-177. ISSN 1057-5219 doi: 10.1016/j.irfa.2015.05.015

Abstract/Summary

This paper studies the effect of World War Two (WWII) on the British stock market. It contributes to the literature in several ways. First, this paper thoroughly investigates the impact of historically major events on the British stock market using a variety of empirical approaches in order to ensure a comprehensive examination of the im- pact of WWII on British stock returns. We utilise an event study of pre-selected historically major events, an in- vestigation of the possible causes of the largest price movements as well as utilising an endogenous procedure testing for structural breaks. Secondly we extend the literature on behavioural finance and investor sentiment in extreme circumstances. In particular we examine the ‘negativity effect’, documented by Akhtar et al. (2011) and determine whether stock returns reacted more strongly to negative events or positive events. Overall we find limited evidence of strong links between war events and market returns although there is support for the ‘negativity effect’.