Impact of geopolitical risk on the volatility spillovers among G7 and BRICS stock markets

Abstract

Geopolitical risk (GPR) plays an important role in the international financial interactions. Previous studies have mostly analyzed the impact of the GPR on the return or volatility of financial assets, and less attention has been paid on the connection among international stock markets. Therefore, this study attempts to explore the impact of GPR on the volatility spillovers among G7 and BRICS stock markets using the impulse response function. To be specific, TVP-VAR model is utilized to capture the dynamic volatility spillovers among 12 stock markets, and we obtain the total and directional spillover indexes. Then, impulse response function based on the VAR model is applied to capture the dynamic effect of GPR on the spillover series. Based on the weekly price data ranging from August 16, 2002 to April 10, 2023, we find that the volatility spillover index increases when there are large shocks to the market such as war, financial crisis and COVID-19. In addition, the impact of GPR on the total spillover index is negative in the early and late periods, and it shows a more significant positive effect in the middle period. These results reflect the dynamic impact of GPR on the connection among international stock markets, which is essential for the international financial risk management.