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Geopolitical risk exposure and stock returns: Evidence from China

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  • Zhang, Yaojie
  • Zhang, Yuxuan
  • Ren, Xinrui
  • Jin, Meichen

Abstract

This study explores the effect of geopolitical risk on stock returns in China. We identify a significant premium associated with low geopolitical risk exposure: stocks with lower geopolitical risk exposure outperform the ones with higher geopolitical risk exposure in the ensuing months. Our findings suggest that this premium is not attributable to risk-adjusted factors or recognized common pricing factors. Moreover, the robustness of this premium can be demonstrated by a range of alternative settings. Finally, we provide a potential explanation for the low risk exposure premium: geopolitical risk shocks lead to increased investor attention, making investors more inclined to purchase stocks with low risk exposure to hedge against geopolitical risk.

Suggested Citation

  • Zhang, Yaojie & Zhang, Yuxuan & Ren, Xinrui & Jin, Meichen, 2024. "Geopolitical risk exposure and stock returns: Evidence from China," Finance Research Letters, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:finlet:v:64:y:2024:i:c:s1544612324005099
    DOI: 10.1016/j.frl.2024.105479
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    More about this item

    Keywords

    Geopolitical risk; Cross-section of stock returns; Return predictability; Chinese stock market;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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