Emerging markets equities’ response to geopolitical risk: Time-frequency evidence from the Russian-Ukrainian conflict era

Abstract

This study investigates the asymmetric interdependence between geopolitical risk (GPR) and the stock markets of the top-seven emerging (E7) countries (i.e., Mexico, Russia, Turkey, India, China, Indonesia, and Brazil) in the ongoing geopolitical conflict between Russia and Ukraine. With daily datasets covering the period 01-Feb-2022 to 25-July-2022, the squared wavelet coherence (SWC) and wavelet coherence phase difference (WCPD) techniques are employed. The results underscore heterogeneous and asymmetric market-specific coherence and lead-lag patterns regarding E7 stocks' interdependence with geopolitical risk. The findings imply high comovements between Black Swan events like the Russian-Ukrainian conflict and financial markets' volatility, highlighting the essence of alternative assets or asset classes for hedging geopolitical risks in the ongoing military actions. The heterogeneous and asymmetric responses offered by E7 stocks against GPR render emerging markets equities suitable for diversification and downside hedging strategies against GPR-induced shocks. The findings are robust to the time-varying parameter vector autoregression (TVP-VAR) connectedness approach. The results’ implications for portfolio managers, investors, and policymakers are discussed.