The impact of geopolitical risks on foreign exchange markets: Evidence from the Russia–Ukraine war

Abstract

We examine the relationship between geopolitical risks and foreign exchange markets using the Russia–Ukraine conflict as a natural experiment. Our main findings indicate that, due to intensified geopolitical risks, the conflict had a negative effect on foreign exchange rates. This adverse effect of geopolitical risks is more pronounced in countries with high reliance on Russian energy, countries with a high level of economic policy uncertainty, countries with geographic proximity to Russia and Ukraine, and countries where the degree of political rights, and freedom of political expression is elevated. Our additional analyses suggest that the Russian invasion of Ukraine has also negatively affected the return and volatility of the global equity markets.