Abstract
Geopolitical uncertainties have been a concern for global economies and financial markets’ participants. By employing Markov switching regression and quantile regression, we investigated the effect of global and country-specific geopolitical uncertainties on Malaysian Conventional and Islamic stock returns in different market conditions. The estimated results of the Markov switching regression show that Malaysian conventional and Islamic stocks react differently to global and country-specific geopolitical uncertainties under different market volatility conditions, implying volatility dependent exposures and reactions to global and country-specific geopolitical uncertainties. The quantile regression results also reveal that Malaysian conventional and Islamic stocks respond differently to global and country-specific geopolitical uncertainties at different market stages. The empirical findings, therefore, indicate a heterogeneous and non-linear stock reaction to geopolitical uncertainties, providing new insights into geopolitical uncertainties and stock return relationships. Hence, the results will be valuable for asset pricing and investments in an emerging market such as the Malaysian market.
Highlights
Geopolitical risk (GPR) or geopolitical uncertainty is defined as “the risk associated with wars, terrorist acts, and tensions between states that affect the normal course of domestic politics and international relations” [1] (p. 4)
The results are linked to Hoque and Zaidi [16], as it is evident that Malaysia’s stock market appears to respond negatively to global economic policy uncertainty and that the response differs across states of volatility
Understanding how the effects of global and country-specific geopolitical uncertainties vary across the stock markets, structures, and conditions is of great importance for investors, where the knowledge could be used to promote asset pricing and a well-diversified global portfolio
Summary
Geopolitical risk (GPR) or geopolitical uncertainty is defined as “the risk associated with wars, terrorist acts, and tensions between states that affect the normal course of domestic politics and international relations” [1] (p. 4). Geopolitical uncertainty is one of the influential risk factors for financial markets [2,3,4,5]. The effects of geopolitical uncertainty on stock market performance have mostly been reported as negative effects in the literature because political uncertainties create an unfavorable economic environment that limits the stock market’s ability to perform well. Hoque et al [6] empirically show that political instabilities and uncertainties limit the economic growth and stock market development of Bangladesh. Political uncertainties tend to have an adverse effect on the economic and financial environment. They criticize the fact that those political uncertainties are prime reasons for the low market participation, which could reflect a decline in stock prices
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