Market learning from sequential geopolitical escalations: Evidence from airline stocks

This study examines how financial markets respond to three sequential conflict escalations of increasing geographic scope: a local episode in Israel, a regional episode involving Iran, and a global episode involving the United States. Using a sequential event-study framework and a sample of 56 publicly traded airlines, we find that greater direct exposure to conflict-related regions is associated with larger immediate negative abnormal returns, primarily during the local episode. Across successive episodes, this pattern attenuates and partially reverses. Israeli airlines were eligible for government war-risk insurance from the outset, whereas eligibility for foreign airlines was extended only at the end of the regional episode. Markets took several months to fully incorporate the implications of domestic coverage, while the later extension of coverage appears to have been incorporated within days of the global episode. We find only partial support for a monotonic increase in market responses with escalation scope. Among airlines with pre-event Israeli operations, low-cost carriers experience larger losses than full-service carriers. Overall, the evidence indicates that exposure-based pricing is strongest during the initial local episode but weakens as the conflict broadens, with common geopolitical risk becoming increasingly salient relative to airline-specific exposure. This pattern is consistent with markets incorporating information from prior episodes and evolving policy responses, although controlling for macroeconomic and institutional conditions does not fully distinguish learning from these alternative drivers.