The Relationship Between Geopolitical Risks and Stock Market Volatility

Yuanxin Wang

doi:10.54097/vtxp2w40

Authors

Yuanxin Wang

DOI:

https://doi.org/10.54097/vtxp2w40

Keywords:

Geopolitical risk, Stock market volatility

Abstract

In the globalized economic system, geopolitical conflicts are increasingly prominent as an important factor affecting stock market volatility. This essay delve into deeply explore the complex relationship between geopolitical risks and stock market volatility, and comprehensively analyze this area from a macro perspective through the combination of theory and empirical methods. First, this essay defines geopolitical risks systematically and explores various sources. Further, this essay analyzes the broad impact of geopolitical risks on the global economy and economic financial system. With regard to the stock market volatility, this essay introduces the measurement method of stock market volatility. In order to fully understand the impact of geopolitical risks on the stock market volatility, this essay conducts deep analysis from two dimensions of market sentiment and capital flows. In order to more specifically illustrate the impact of geopolitical risks on stock market volatility, this essay conducts an in-depth analysis using the Russian-Ukrainian war as a case study. This case not only shows the direct impact of geopolitical conflicts on stock market volatility, but also reveals the deep economic and financial logic behind it. The research in this paper not only helps to deeply understand the mechanism of the impact of geopolitical risk on stock market volatility, but also provides a useful reference for investors and policy makers. In the face of geopolitical risks, investors should pay more attention to relevant information in order to make more informed investment decisions. Policy makers should strengthen real-time monitoring of geopolitical risks and take corresponding risk prevention measures to maintain the stability of financial markets.

Downloads

Download data is not yet available.

References

[1] Caldara, D., & Iacoviello, M. (2022). Measuring geopolitical risk. American Economic Review, 112(4):1194-1225.

[2] Engle, R. F., & Campos-Martins, S. (2020). Measuring and hedging geopolitical risk. NYU Stern School of Business Forthcoming.

[3] Glen, J. D. (1994). An introduction to the macro structure of emerging markets (Vol. 63). World Bank Publications, The Washington.

[4] Bhatia, A., & Binny, A. (2014). Analysis of stock market volatility: a comparative study of India and China. Apeejay Journal of management and Technology, 9(8):8-17.

[5] Salisu, Afees A., et al. (2022) Geopolitical risk and stock market volatility in emerging markets: A GARCH–MIDAS approach. The North American Journal of Economics and Finance 62: 101755.

[6] Arin, K.P., Ciferri, D., Spagnolo, N., 2008. The price of terror: the effects of terrorism on stock market returns and volatility. Econ. Lett. 101:164‒ 167. Bloom, Nicholas. (2009)"The impact of uncertainty shocks." Econometrica 77.3: 623-685

[7] Wang, X., Wu, Y., & Xu, W. (2019). Geopolitical risk and investment. Journal of Money, Credit and Banking.

[8] Eckstein, Z., Tsiddon, D., (2004). Macroeconomic consequences of terror: theory and the case of Israel. J. Monet. Econ. 51: 971‒ 1002.

[9] Caldara, D., Iacoviello, M., (2022). Measuring geopolitical risk. Am. Econ. Rev. 112:1194‒ 1225.

[10] Schwert, G. W. (1990). Stock market volatility. Financial analysts journal, 46(3): 23-34.

[11] Fama, E. F. (1965). The behavior of stock-market prices. The Journal of Business, 38(1):34–105

[12] Ruan, Q., Yang, H., Lv, D., et al. (2018). Cross-correlations between individual investor sentiment and Chinese stock market return: New perspective based on MFDCCA [J]. Physica A: Statistical Mechanics and its Applications, 503:243–256

[13] Ni, Z. X., Wang, D. Z., & Xue, W. J. (2015). Investor sentiment and its nonlinear effect on stock returns—New evidence from the Chinese stock market based on panel quantile regression model. Economic Modelling, 50:266-274.

[14] Antoniou, C., Doukas, J. A., & Subrahmanyam, A. (2016). Investor sentiment, beta, and the cost of equity capital. Management Science, 62(2):347-367.

[15] Guo, P., & Shi, J. (2024). Geopolitical risks, investor sentiment and industry stock market volatility in China: Evidence from a quantile regression approach. The North American Journal of Economics and Finance, 72:102139.

[16] Luo Ssi. (2017). Research on the impact of Geopolitical Risk on International Capital Flows (Master's Thesis, Zhejiang Gongshang University)