Abstract
We analyze the impact of the pro-Russian conflict on stock returns in Russia and the Ukraine during the period November 21, 2013 to September 29, 2014. We utilize four newly created indicators for the degree of (de-)escalation based on an Internet search for conflict-related news. We find that escalation of the conflict is bad news for investors in both stock markets. Russian returns decrease by as much as 21 basis points (bps) after a 1 percentage point (pp) increase in escalation and Ukrainian returns drop by even more (up to 30 bps). In total, (de-)escalation of the pro-Russian conflict in the Ukraine accounts for a variation of up to 14.6 (33.4) pp in the Russian (Ukrainian) stock market. We also find that news from international sources is more relevant for investors in the Russian stock market than is news from Russian sources.
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Notes
We focus on EU sanctions since EU member states account for about 50 % of Russian exports and imports. In addition, EU investments make up as much as 75 % of all foreign direct investment stocks in Russia. Source: European Commission.
Source: CSIS (2014).
Conditioning on Ukrainian sources leaves us with too few observations for a serious analysis as we have less than 100 hits for either of the four searches over the full sample period.
Note that we observe a negative and significant influence of past S&P 500 returns on today’s PFTS returns in the Rebels column. In addition, the sign for lagged volatility in this column is the opposite of the other three specifications. As both variables show a pronounced negative correlation (ρ = − 0.31), collinearity with the Rebels (de-)escalation indicator might explain this switch in signs. Nevertheless, it is worth noting that the results of our key explanatory variable, that is, the (de-) escalation indicators, are virtually unchanged across specifications.
Sanctions: t = 8.02, p-value: 0.00; Rebels: t = 2.69, p-value: 0.01; Conflict: t = 2.89, p-value: 0.00; Crisis: t = 13.13, p-value: 0.00.
Note that in the case of Ukrainian stock returns and the Crisis (de-)escalation indicator, the influence of positive innovations on the conditional variance equation is stronger than that of negative innovations.
Sanctions: ρ = 0.07, p-value: 0.37; Rebels: ρ = 0.04, p-value: 0.57; Conflict: ρ = 0.06, p-value: 0.43; Crisis: ρ = 0.06, p-value: 0.43.
Russia Sanctions: t = 1.00, p-value: 0.32; Russia Rebels: t = −0.28, p-value: 0.78; Ukraine Sanctions: t = −0.07, p-value: 0.95; Ukraine Rebels: t = 0.16, p-value: 0.87; Ukraine Conflict: t = 0.06, p-value: 0.95; Ukraine Crisis: t = 0.08, p-value: 0.94.
Source: IMF World Economic Outlook April 2015 Edition.
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We thank two anonymous referees for their helpful comments on an earlier version of this paper. The usual disclaimer applies.
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Hoffmann, M., Neuenkirch, M. The pro-Russian conflict and its impact on stock returns in Russia and the Ukraine. Int Econ Econ Policy 14, 61–73 (2017). https://doi.org/10.1007/s10368-015-0321-3
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DOI: https://doi.org/10.1007/s10368-015-0321-3