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The Impact of Geopolitical Risks on Equity Markets and Financial Stress: A Comparative Analysis of Emerging and Advanced Economies

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  • Amirali Nasouri

Abstract

Purpose: This study aims to comprehensively analyze and compare the impacts of geopolitical risks on equity markets and financial stress in both emerging and advanced economies. We seek to understand how GPR affects market returns, volatility, and overall financial stability across different economic landscapes. Design/Methodology/Approach: We employ a multi-faceted approach utilizing various econometric techniques. These include the GARCH-MIDAS model for volatility prediction, lead-lag regression, Markov regime-switching model, and panel quantile estimation. We use the geopolitical threats (GPT) index of Caldara and Iacoviello and consider both composite and decomposed GPR indices. Our analysis covers major emerging economies and the G7 countries, using daily stock returns and monthly GPR data. Findings: Our findings reveal significant disparities in how geopolitical risks impact emerging and advanced economies. The U.S. equity market, particularly in the information technology and financial sectors, shows positive returns during high geopolitical threats. In contrast, emerging markets exhibit increased stock market volatility in response to GPR. Financial stress in emerging economies intensifies with increased GPR, especially when financial conditions are already strained. Advanced economies primarily witness GPR effects in their stock markets. Practical Implications: The study also identifies optimal hedging strategies, such as between the U.S. market and gold, during periods of high geopolitical threats. These results have important implications for investment strategies and policy decisions in the face of geopolitical uncertainties. Originality value: Geopolitical risks (GPR) significantly influence global financial markets. However, their impacts differ across economies and market segments. Previous studies have shown varied effects of GPR on asset prices, stock market volatility, and financial stress in different economic contexts.

Suggested Citation

  • Amirali Nasouri, 2025. "The Impact of Geopolitical Risks on Equity Markets and Financial Stress: A Comparative Analysis of Emerging and Advanced Economies," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 30-41.
    • Handle: RePEc:ers:ijebaa:v:xiii:y:2025:i:1:p:30-41
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    More about this item

    Keywords

    Geopolitical risk (GPR); equity markets; financial stress; emerging economies; advanced economies; market volatility.;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G01 - Financial Economics - - General - - - Financial Crises
    • F52 - International Economics - - International Relations, National Security, and International Political Economy - - - National Security; Economic Nationalism
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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