Geopolitical risk and the returns and volatility of global defense companies: A new race to arms?

The ongoing war in Ukraine and rising geopolitical tensions between Russia and western countries have led several European countries to increase defense spending to historic levels. Under such intense circumstances, we examine the co-movements between the daily geopolitical risk (GPR) index and the daily returns and volatility of 36 global defense and aerospace companies covering ten countries and three continents. Using the wavelet coherence approach, we find significant co-movement concentrated around the eruption of the war in Ukraine, mostly for medium and longer scales, indicating a flight-to-arms phenomenon. The strong co-movement is significant for most of US and European companies. Specifically, the GPR index leads the return and volatility of several US and European companies at medium and longer scales throughout the war period, and its impact is mostly positive. Our findings offer new and interesting implications for multi-horizon market participants such as traders and investors.