Geopolitical risk and excess stock returns predictability: New evidence from a century of data

Abstract

This study applies a new series of geopolitical risk historical indices developed by Caldara and Iacoviello (2022) to predict stock returns. Empirical results show that the geopolitical threats index (GPRHT) can help in predicting stock returns, especially during expansion. Combined the geopolitical indices and 14 famous macroeconomic variables can yield good out-of-sample performances from statistical and economic viewpoints. Our research provides fresh perspectives on stock return predictability in light of geopolitical risks.