The Zelensky moment: Investments in the defense industry and geopolitical risk awareness of European investors

Why do investors in Europe respond differently to similar geopolitical events? While prior research shows that geopolitical risk affects asset allocation, little is known about how awareness of geopolitical risks varies across countries and investor types. We examine this question by analyzing European investors’ reactions to rising tensions in Ukraine following Volodymyr Zelensky’s election in 2019, using detailed data from the European Central Bank on holdings of international defense stocks across 26 European countries from 2010 to 2025. We contribute to the literature on geopolitical risks by showing how defense-stock holdings serve as a proxy for geopolitical risk awareness, because they capture investors’ revealed preferences and reflect investors’ expectations about future cash flows and risk-adjusted returns in response to geopolitical developments. Investments in defense stocks provide a direct, timely signal of investor attention that goes beyond traditional survey- or news-based indices such as the widely used GPR index by Caldara and Iacoviello (2022). Our findings indicate that following Ukraine’s 2019 political transition, investors from countries with a Soviet legacy increased their holdings of defense stocks more sharply than their counterparts in Western Europe, with the effect particularly pronounced among retail investors. These differences emerge gradually as tensions intensify but rise sharply following Zelensky’s election, consistent with heightened sensitivity to geopolitical developments among countries that are geographically and politically closer to Ukraine. By capturing early investment responses to geopolitical events, our study provides a novel perspective on how both location and investor type shape awareness of geopolitical risks.