Abstract
We investigate the effect of geopolitical risk on the returns of firms in the Information Technology, Communication Services, and Consumer Staples sectors within the S&P 500 index. We use the event study methodology and perform more than 17,000 regressions to provide empirical evidence at sector level that geopolitical risk leads to different responses across these three sectors. The response of the Information Technology sector is negative for all event windows under study, except the one spanning 10 days prior to the geopolitical event and 10 days after. The Communication Services sector has positive returns as a result of geopolitical events for all event windows, except the one from the geopolitical event date and 5 days after. The Consumer Staples sector shows a negative impact on geopolitical risk for all event windows except the one from the geopolitical event date and 5 days after, demonstrating a negative correlation to the Communication Services sector.
Highlights
We investigate the impact of geopolitical risk on the market returns of the Information Technology, Communication Services, and Consumer Staples sectors of the S&P 500 index, as well as compare the Geopolitical risk (GPR) impact between these sector returns
We began this study intending to explore the impact of geopolitical risk on the stock returns of the Information Technology, Communication Services, and Consumer Staples sector firms belonging to the U.S S&P 500 index and compare the GPR impact between these sector returns
Geopolitical risk is a result of uncertainty introduced by geopolitical events, and we captured these events using the benchmark GPR index of Caldara and Iacoviello (2018)
Summary
Adverse geopolitical events and threats often result in uncertainties or risks on global economies, local economies, as well as general financial markets such as the stock exchange. Geopolitical risk (GPR) exists because of the risks associated with the realization of (adverse) events and due to the escalations thereof. Caldara and Iacoviello (2018) found that while the realization of adverse geopolitical events leads to smaller economic effects because the uncertainty is usually addressed and resolved, the shocks of geopolitical threats are usually protracted, leading to a rise in uncertainty and adverse economic activity. Their study revealed that in the U.S, as well as around the world, stock returns respond asymmetrically to the threats and realizations of geopolitical events. Their study revealed that in the U.S, as well as around the world, stock returns respond asymmetrically to the threats and realizations of geopolitical events. Derousseau (2018)
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