Impact of Cross-Country Conflict on Stock Market Return

Abstract

This study looks at how cross-country conflicts affect stock market returns. It also shows how a country’s financial health changes this effect. Many studies say that conflicts always reduce market performance. But this study wants to test if that is always true. It looks at a country’s financial strength, like government debt and foreign exchange reserves. These factors help us understand how badly the market is affected. The study uses monthly data. It has 616 observations from six countries. These countries are India, Israel, Lebanon, Mexico, Pakistan, and Ukraine. The data covers the time from February 2017 to September 2025. A Two-Way Fixed Effects model is used in this study. It also uses Driscoll–Kraay standard errors to measure the results properly. The results show that conflicts do not always cause a big drop in stock returns. Sometimes the effect is small. The impact depends on a country’s financial condition. In countries with high debt, the negative effect becomes much stronger. In countries with low foreign exchange reserves, the effect is even worse. It can be more than 16 times stronger than normal periods. This means stock market drops after conflicts are mainly caused by weak financial conditions. It is not only because of the conflict. Overall, the study shows that strong reserves and low debt are very important. These help protect markets from outside attacks. The findings are useful for investors and policymakers. They also help us understand how economies stay strong during difficult times.