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Geopolitical risk and stock prices

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  • Yilmazkuday, Hakan

Abstract

This paper investigates the effects of global geopolitical risk on stock prices of 29 economies by using the local projections method for the monthly period between 1985M1-2023M9. The results show that a positive unit shock of global geopolitical risk (normalized to one standard deviation) reduces stock prices (normalized to one standard deviation) in a statistically significant way by 0.80 in Latvia, 0.71 in China, 0.62 in the Euro Area, 0.50 in Sweden, 0.42 in the United Kingdom, 0.39 in the United States, 0.38 in Switzerland, 0.34 in Israel, 0.28 in Canada, and 0.21 in Denmark in a year following the shock, whereas it increases those only in Iceland by 0.28 that can be used to hedge against any geopolitical risk. Subsample analyses further suggest that the negative effects of the same shock exist in several economies (including the United States, China and Euro Area) during the first half of the sample period that coincides with the geopolitical events that the United States is involved with, whereas they only exist in Russia, Poland, Euro Area and the United Kingdom for the second half of the sample period, suggesting that the Russo–Ukrainian War has mostly affected the stock prices in these nearby economies. It is implied that the geographical location of geopolitical events as well as the countries involved are important indicators to understand the effects of any global geopolitical risk on stock prices.

Suggested Citation

  • Yilmazkuday, Hakan, 2024. "Geopolitical risk and stock prices," European Journal of Political Economy, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:poleco:v:83:y:2024:i:c:s0176268024000557
    DOI: 10.1016/j.ejpoleco.2024.102553
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    References listed on IDEAS

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    More about this item

    Keywords

    Geopolitical risk; Stock prices; Local projections method;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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