The Impact of the 2023 Gaza War on the Palestinian and Israeli Stock Markets Within the Framework of Political Finance

Özet

This study examines how the escalation of the Gaza War after 7 October 2023 affected the stock markets of Palestine and Israel amid heightened geopolitical uncertainty and shallow market depth. Using daily data from 1 January 2023 to 12 November 2025, the stock index series is transformed into a return series by taking logarithmic differences. The empirical framework incorporates two key risk indicators: a dummy variable beginning on 7 October 2023 to capture the direct effect of the Gaza War, and the Global Geopolitical Risk Index (GPR) to reflect the broader international uncertainty environment. Methodologically, the study employs a historical decomposition approach derived from a Vector Autoregressive (VAR) model. This framework enables tracing the marginal and cumulative contributions of structural shocks associated with the war dummy and geopolitical risk over time, thereby providing a more dynamic perspective than standard event-window analyses. Lag lengths are selected using the Akaike Information Criterion, yielding one lag for the Palestinian model and three for the Israeli model. Model stability is verified by the inverse AR roots remaining within the unit circle. The results reveal a clear asymmetry in market responses. In the Palestinian stock market, the war-related shock turns negative, with a pronounced break around October 2023, and dissipates only gradually. In contrast, the Israeli stock market exhibits a sharp, two-sided, and short-lived repricing concentrated in the conflict's initial phase. Overall, the findings suggest that the same geopolitical shock is priced differently across two neighbouring shallow markets, and that differences in market depth, liquidity conditions, and risk-perception channels play a central role in shaping this divergence