Risk or opportunity: how do multiple uncertainties affect defense stocks?

This is the authors' abstract. We don't add key points for this paper.

In light of the growing complexity of external risks, defense stocks (DEF), with both strategic and financial features, warrant examination. This paper examines the dynamic responses of DEF to multiple uncertainty shocks, including geopolitical risk threats (GPRT), geopolitical risk acts (GPRA), economic policy uncertainty (EPU), and supply chain pressure (SCP), using the joint impulse response function (jIRF) and joint quantile impulse response function (jQIRF). The results indicate that, according to the jIRF estimates, multiple uncertainty shocks generally elicit a positive response from DEF, but this response does not exhibit a persistent expansionary pattern. Further analysis shows DEF responds differently to different types of uncertainty. Specifically, GPRT is the major driver for the positive relationship between uncertainty and DEF, whereas the positive influence of GPRA is limited. Furthermore, the jQIRF analysis reveals that DEF’s positive response to uncertainty shocks intensifies with ascending quantile levels, yet turns negative at the highest quantile, suggesting that during periods of significant market exuberance, uncertainty shocks pose risks. These findings offer valuable lessons for risk monitoring and decision-making in the defense capital market, helping policymakers evaluate shifts in complicated external environments, and offering empirical justification for investors to allocate and manage risks of their defense stocks.