The effects of economic sanctions on targeted countries’ stock markets

Although much previous research has investigated the impact of sanctions on trade and global capital, few academic studies have explored the effect of sanctions on stock markets in targeted countries. The lack of research is surprising as a frequent goal of sanctions is to inflict pain on financial markets in targeted countries to promote policy change. Using monthly market data for 66 countries from 1990 to 2005, we find that the introduction of import sanctions by countries with developed economies, such as those with membership in the G20, has a significantly negative impact on stock market valuation in targeted countries. However, this effect only occurs when targeted states are not already subject to multiple sanctions. Our study suggests that sanctions can have a negative effect on stock market value in targeted countries, but that their effectiveness is relatively limited in practice due to the overuse of sanctions. This finding is supported by the marginal decrease in the negative effect on the target’s stock market as the number of sanctions increases.