Fortress or flow? : Investigating abnormal returns in the European defense market during the Russian invasion of Ukraine

Following the Russian invasion of Ukraine on February 24, 2022, European asset managers and pension funds have shown increased interest in defense stocks, spurred by growing expenditure in defense spending. This study investigates whether the invasion triggered significant abnormal returns in the European defense sector, as well as how these reactions relate to the theory of market efficiency. The goal is to inform investors and policymakers about market reactions to geopolitical shocks, particularly in sectors with different informational characteristics. We apply event study methodology using the market model, with the Fama-French Three-Factor Model serving as a robustness check. The estimation window spans 120 trading days, followed by a 10-day gap before the event window, which covers the day before, the day of, as well as the day after the invasion. Both models reveal statistically significant positive abnormal returns for the defense portfolio. The market model shows strong abnormal returns on the day of and the day after the invasion. The Fama-French model additionally identifies a significant reaction all three days, suggesting both models had lagging reactions, with a degree of anticipation for the Fama-French model. These findings lead to the conclusion that the Efficient Market Hypothesis does not fully apply to the European defense sector, likely due to its unique informational characteristics and sensitivity to political developments.