Geopolitical turbulence and market reactions: examining the effects of conflicts on stock markets through geographic proximity and trade relations

Purpose This study aims to analyze the varied stock market reactions of select European and Middle Eastern economies to the Russia–Ukraine War and the Israel-Hamas conflict, providing evidence for the trade relations and geographic proximity hypotheses. Moreover, the varied size of the event windows is aimed at providing an intermediate, medium and long-term perspective on the response of the sample economies to the two selected geopolitical events. Design/methodology/approach The study uses the event study methodology to quantify the magnitude and direction of the impact of the two events on the performance of European and Middle Eastern financial markets. Based on market efficiency theory, the study uses the single index market model to capture abnormal returns on the event dates and across the event windows. The vast majority of academic studies, particularly when dealing with macro indices, have used the single index model due to its simplicity and ability to isolate abnormal returns from the total estimated returns efficiently. Findings The study has verified and established the trade relations and geographic proximity hypotheses. The findings reveal the differential impact of the two conflicts on the sample countries. The European countries have been greatly impacted by the Russia–Ukraine War due to the significant bilateral trade relations that Europe holds with Russia and Ukraine. On the other hand, the Middle Eastern countries are severely impacted by the Israel–Hamas conflict, given the proximity of the Middle East to the Israel–Palestine region and the importance of the latter for ensuring economic and geopolitical stability in the Middle East. Overall, the results reveal a greater role of proximity in the intermediate context, while trade relations tend to remain the consistent drivers of financial market responses to geopolitical events. Originality/value While several studies have analyzed the market reaction across the two events, all of them are isolated from a geopolitical event perspective. The present study provides a comparative analysis of the two different geopolitical events, the Russia–Ukraine War and the Israel–Hamas conflict and analyzes the impact of each conflict on a set of markets that share commonalities either from the perspective of trade relations or geographic proximity. By simultaneously testing the trade relations and geographic proximity hypotheses across regions and sectors, it advances understanding of cross-conflict contagion mechanisms rather than methodological novelty.