Geopolitical Risk And Responses To Financial Markets

Abstract

The Geopolitical risk (GPR) generated by the Russian invasion of Ukraine has triggered various impacts and responses in terms of financial markets and investors’ sentiments regarding sensible actions. The purpose of this study was to focus on GPR and responses to financial assets and commodities using a vector autoregressive (VAR) model. The results uncovered differences in the various responses of financial assets and commodities in different durations. It was found that under increasing GPR, gold is a safe haven for energy commodities, while bitcoin is safe haven for the capital market, and treasury bonds and US dollars are a safe haven for other various financial assets as well as commodities such as energy. Since gold’s behavior is determined by itself, investment in gold can help reduce risk in portfolios when there is an increase in geopolitical risk and at times of a bearish market.