Geopolitical risk and stock liquidity

Abstract

In this paper, we examine the relationship between geopolitical risk and stock liquidity. Using an international sample of publicly listed firms, we find that higher geopolitical risk is associated with lower stock liquidity, and this is mainly driven by the expectations and threats of geopolitical tensions, rather than their effective realization and escalation. Also, we observe the largest decrease in stock liquidity in correspondence of stocks traded in less liquid markets and whose preexisting liquidity was already low, as well as stocks whose issuers are more financially constrained and less transparent. Our results shed light on the stock market implications of geopolitical risk and show that financing constraints and information asymmetry are two relevant features in explaining these implications.