Nada MSELMI recently published her paper “Do defense stocks benefit from geopolitical Risk? asymmetries across time horizons and market states,” co-authored with A. Lahiani and S. Mefteh-Wali, in the Journal of International Financial Markets, Institutions & Money.
Abstract: Firms in the aerospace and defense sector are often seen as potential beneficiaries of geopolitical tensions, but prior evidence on whether they systematically gain from geopolitical risk is limited and mixed. This paper examines the comovement between geopolitical risk and defense stock returns using daily data from 2008 to 2023 across multiple crises, and shows significant comovement asymmetries across both investment horizons and market states. Like other stocks, defense stocks are susceptible to short-term price drops in response to geopolitical risk, reflecting a flight-to-quality by investors. At longer horizons, however, they comove positively with geopolitical risk, consistent with a flight-to-arms effect as investors anticipate higher defense spending. Major spikes in geopolitical risk prolong the flight-to-quality effect before the flight-toarms effect emerges. Easing geopolitical tensions do not lead to a short-term positive return-torisk effect, and while a negative return-from-arms effect emerges, it does so with a delay. Our findings contribute to our understanding of industry differences in geopolitical risk exposure, and show that defense stocks are not short-term hedges but contingent long-term plays on geopolitical cycles.