Effects of Israel-Iran conflict: insights on global stock indices and currencies

Abstract

Purpose

This study examines the immediate impact of the Israel-Iran conflict on global stock markets and currency pairs, focusing on how these effects vary by market maturity and geographic region.

Design/methodology/approach

This study uses the event study method to examine the immediate effect of the Israel-Iran conflict. It uses the market model across a 252-day estimation window through −257, −6 trading days and an 11-day event window through −5, +5 trading days. The primary sample includes 73 stock market indices, 7 EURO currency pairs, 14 USD currency pairs, 6 GBP currency pairs, and 7 JPY currency pairs.

Findings

The findings suggest that (1) the global stock markets are adversely affected by the Israel-Iran conflict, (2) the JPY, GBP, and EURO currency pairs are least affected, (3) the USD currency pairs exhibit positive abnormal returns suggesting flight to safety, (4) the frontier and standalone markets experience most adverse effects, followed by developed and emerging markets, (5) the pan-American stock markets experience more pronounced effects of the conflict, followed by the Europe, Middle East, and African stock markets and the Asia Pacific stock markets.

Research limitations/implications

The findings advise investors to manage risk during geopolitical uncertainty through diversification and hedging. Policymakers should monitor developments and enact responsive measures. Market participants can capitalize on insights for strategic investment.

Originality/value

The study contributes to the extant war literature by exploring the impact of the Israel-Iran conflict on global stock markets and currency pairs. This study serves as the first to examine the effects of the escalating conflict due to Iran’s attack on Israel.

Citation

Pandey, D.K. (2024), "Effects of Israel-Iran conflict: insights on global stock indices and currencies", Journal of Economic Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JES-04-2024-0286