Uncertainty, stock and commodity prices during the Ukraine-Russia war

ABSTRACT

This article mainly investigates whether the war in Ukraine-Russia induces uncertainties and how this affects the returns of world stock market indices and commodity prices. To do so, we use the Economic Policy Uncertainty index (EPU), 96 stock market indices and the price of 67 commodities worldwide over the period from January 2022 to April 2023. Our empirical results show that the war between Ukraine and Russia increases uncertainties, and which negatively affect the performance of global financial markets and lead to higher commodity prices. These negative shocks tend to be smaller the longer the war persists. We also observe that responses to war-induced uncertainties are stronger in Europe and America. Overall, we provide unique evidence of the impact of war on uncertainties and how this is transmitted to stock market performance and commodity prices.

KEYWORDS:

• Ukraine-Russia war
• uncertainty
• stock index

JEL CODE:

• H56
• G11
• G14
• G15

Acknowledgements

We thank two anonymous referees for helpful comments and discussions. Any remaining errors are ours.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Notes

1 Many studies show the impact of investor’ sentiment on stock prices, such as Huiwen and Sun (2012), Ling, Naranjo, and Scheick (2014), Zheng (2015), Krishnan and Satish (2016), Zhang et al. (2018), Ruan et al. (2018).

2 An excess volatility returns is an important representation of uncertainty in stocks market (Su, Fang, and Yin 2019).

3 The relationship between commodity prices and uncertainty has been investigated by many studies showing all an increase of commodity prices right after an increase in surrounding uncertainty: Yin and Han (2014); Karabulut, Bilgin, and Doker (2020).

4 They use a first principal component analysis (PCA) to combine all the sentiment indexes in order to create the Ukraine-Russia war and economic sanctions sentiment index. They normalize this index to a scale of 1 to 100, with a low value (1 to 49) representing negative sentiment and a high value (50 to 100) representing positive sentiment. For more details on the construction of the index, see Abakah et al. (2023).

5 This index is designed to capture general public sentiment and response as reflected in media coverage from sources such as Twitter, Wikipedia, Google Trends and news articles. However, in its construction the index does not take into account retweets, which can also provide important information on conflict-related anxiety and concern. Similarly, tweets are not processed by country, which could have captured potential heterogeneities by country.

6 Figure 2 and Figure 3 highlight the correlation between the war in Ukraine and the rise in uncertainty. However, the aim of this article is also to verify the existence of a causal relationship between these two elements. To this end, in the following paragraphs we employ a fixed-effects panel model to analyze this causality.

7 While the EPU index is appropriate for our study and has the added advantage of providing an original first approach to estimating uncertainty levels and a comparison between countries and major economic and geopolitical events (such as the war in Ukraine), it does have a few limitations. The main limitation of the EPU index lies in the selection of the media used, which could bias the measurement of uncertainty.

8 One of the limitations of the Investing database is the problem of missing data, particularly for analyses requiring daily data. However, we are less concerned by this phenomenon since our analyses are carried out on a monthly basis.

9 Brogaard et al. (2020) measured the impact of U.S. election cycle (a proxy of global political uncertainty) and find that on average, it leads to a fall in equity returns in fifty non-U.S. countries. Gong et al. (2022) find the same results and show the stocks used for their analysis are more sensitive by the U.S. elections than the elections in their home countries.

10 This decline of war-related uncertainty could also be explained by a decline of interest about the war in media coverages.

11 Fang and Shao (2022) find also that the intensification of the Russia-Ukraine conflict significantly increases the volatility of agricultural, metal, and energy markets.

Additional information

Notes on contributors

Whelsy Boungou

Whelsy Boungou holds a PhD from the University of Bordeaux and is currently Associate Professor of Finance at Paris School of Business. His research interests include empirical banking, climate change and violences.

Alhonita Yatié

Alhonita Yatié is assistant professor of finance at the Université Catholique de l'Ouest. Her research focuses on financial markets, blockchain and climate finance.