Geopolitical Risk Research Articles

Exploring the Impact of China's Internal Circulation Strategy on Its Stock Market under Deglobalization

Abstract In May 2020, China formulated the Internal Circulation Strategy (ICS) to address the risks of global economic downturns caused by deglobalization. This study is the first to empirically examine the impacts of China's ICS on its stock market performance, focusing on investor behavior. Using data from the Baidu search index and the Shanghai and Shenzhen stock exchanges for the period 27 July 2020 to 5 May 2023, the results reveal that stock returns are negatively associated with investor attention to China's ICS, while stock volatilities are positively associated. This suggests that the ongoing and profound shift in economic strategy might have raised concerns among investors. Furthermore, our analysis of heterogeneity finds that the negative association with stock market returns is statistically significant only during times of high policy uncertainty or geopolitical risk. The positive association with stock market volatility is statistically significant only during times of high geopolitical risk. This indicates that the stability of the internal and external environment plays a crucial role in alleviating investor concerns. We also observe mixed impacts on different sectors of the stock markets, with some sectors unaffected while others primarily experiencing a decline in returns.

The Russian invasion of Ukraine and the exchange rate of the Polish zloty: A fallacy of monetary autonomy?

Abstract We use the Twitter application programming interface to construct a novel indicator capturing the varying perceptions of geopolitical risk related to the war in Ukraine. We show that the Twitter variable is a statistically significant determinant of the EUR/PLN exchange rate following the invasion. We estimate that the war in Ukraine was responsible for an increase in the EUR/PLN exchange rate of about 5.0% in the first 2 weeks following its breakout and that the weakening of PLN contributed to an increase of headline inflation in Poland by about 0.33 percentage points. Our findings suggest that monetary policy autonomy can be substantially constrained due to conflicts in nearby countries. Therefore, they provide an argument for Poland in seeking Eurozone membership as a way to contain the impact of geopolitical factors on exchange rate volatility, which is likely to remain at play in the longer run.

Evidence of Geopolitical Risk and Economic Policy Uncertainty on Equity Prices in Emerging Markets

This paper presents evidence of the impact of changes in downside risk , economic policy uncertainty ( ), the geopolitical risk ( ) in six Asian equity markets while controlling for COVIDE-19. Applying the month data for the period of 1990.01– 2021.12 to Asian markets, evidence shows that national stock returns are negatively correlated with and , suggesting that these risk/uncertainty factors harmfully affect stock markets. Evidence shows that a rise in U.S. geopolitical risk adversely spillovers to Asia stock markets. Spreads of COVID-19 damage local stock returns via interacting with changes in EPU and GPR. Purpose: Present evidence of COVIDE-19 and the impact of changes in downside risk , economic policy uncertainty ( ), the geopolitical risk ( ) with different forms of nonlinear specifications in six Asian equity markets. Design/methodology/approach: The rolling regression method is used to derive time-varying coefficients of investors’ response to changes of policy uncertainty, which is sensitive to react to other uncertainty variables. Findings: Evidence shows that national stock returns are negatively correlated with and , suggesting that these risk/uncertainty factors adversely affect local stock markets. In addition, the evidence shows that a rise in U.S. geopolitical risk ( ) can adversely spillover to domestic stock markets. A spillover effect is found from COVID_19 development. Research limitations/implications: The findings are based on data from six Asian markets. More data may be collected, which would expand the analysis to a broader coverage of the global market. Practical implications: Evidence suggests that in addition to the risk from financial markets, the geopolitical risk (GPR) and COVID-19 are important factors in determining whether a risk premium should be received. From a policymaker’s point of view, geopolitical stability is the foundation for maintaining financial market stability. Originality/value: This paper presents evidence on the time-varying behavior of investors’ response to In addition to and the , the nonlinear components of , U.S. and interaction to COVID-19 have a harmful effect on national stock prices in Asian markets.

Does geopolitical risk affect exports? Evidence from China

Geopolitical conflicts and power games among major nations present substantial challenges to cross-border trade and global economic development; however, the existing literature has given limited attention to the underlying macroimpact mechanisms, especially the pivotal role of outward foreign direct investment (OFDI). This paper utilizes export data spanning 2003–2021 to empirically investigate the influence of geopolitical risk on China's exports and unveil its specific internal mechanisms. The findings reveal that China's exports are negatively affected when its trading partners are exposed to geopolitical risk. Notably, China's OFDI is instrumental in mitigating the adverse effects of geopolitical risk on exports. Moreover, the heterogeneity analysis shows that the impact of geopolitical risk on China's exports is more significant in non-Belt and Road countries than in Belt and Road countries. Furthermore, the impact of geopolitical risk on exports also shows significant differences before and after the 2008 financial crisis.

Impact of Geopolitical Risk and Crude Oil Prices on Stock Return

Impact of Geopolitical Risk and Crude Oil Prices on Stock Return

STILL DIRTY: THE EFFECT OF GLOBAL RISKS AND DEVELOPMENT ON FOREIGN DIRECT INVESTMENT INFLOW

There needs to be more research on the global risks and developmental determinants of foreign direct investment inflow with green investment campaigns. This article presents new evidence covering 116 countries (2018–2020) using least squares regression. We show that ceteris paribus, higher perceived environmental and geopolitical risks are more likely to increase foreign direct investment. We also find that lower business environment, safety and security, and environmental sustainability increase foreign direct investment inflow. Meanwhile, foreign investment inflow increased positively according to price competitiveness, infrastructure quality, and natural resources. One development variable, information, and communication technology readiness, becomes significant when the analysis is performed only on developing countries. Economic risks, societal risks, technological risks, health and hygiene, human resources, and international openness are not significantly affecting investment inflow. An insightful theoretical implication regarding the finding is that some supports exist for the pollution haven hypothesis. Implications for practice include creating supportive policies that appreciate sustainable practices, such that investors are attracted to the country not as opportunistic polluters but as sustainability pioneers.

Strategy towards sustainable energy transition: The effect of environmental governance, economic complexity and geopolitics

The Paris Agreement and COP27 have been actively working towards a transition to clean energy (SDG-7) and the restoration of the green environment (SDG-13). Therefore, this study was situated within a comprehensive policy framework. This study aims to investigate the effects of environmental governance and economic complexity on energy transition in 20 OECD countries selected for analysis from 1990 to 2021. This study employs the novel MMQR model to account for slope heterogeneity and cross-sectional dependency. Additionally, an asymmetric analysis was conducted to examine the mediating and moderating roles of geopolitical risk in the relationship between environmental governance, economic complexity, and energy transition. The primary findings of this study indicate that (1) environmental governance and economic complexity have a stimulating effect on energy transition at different levels of quantiles. Strict environmental policies have played a critical role in the transition to clean energy. Furthermore, the interaction between environmental governance and geopolitical factors negatively impacts energy transition at various quantiles; (2) economic complexity demonstrates a positive association with energy transition, as countries with high economic complexity possess the necessary resources, capabilities, and resilience to effectively address the challenges and seize the opportunities associated with transitioning to cleaner and more sustainable energy sources. However, the interaction of economic complexity with geopolitics transforms the positive influence of geopolitics into a negative influence on energy transition. The novel nonparametric panel Granger causality test establishes a significant causal relationship, revealing that environmental governance and economic complexity can support energy transition by creating a favorable environment for clean energy adoption, fostering innovation, facilitating effective planning and implementation, enhancing economic resilience, and promoting international collaboration.

Interpretable corn future price forecasting with multivariate time series

AbstractEfforts in corn future price forecasting and early warning play a vital role in guiding the high‐quality development of the agricultural economy. However, recent years have witnessed significant fluctuations in global corn future prices due to the impact of COVID‐19 and the escalating risks associated with geopolitical conflicts. Therefore, there is an urgent need for accurate and efficient methods to forecast corn future prices. To address this challenge, a novel and comprehensive framework for explainable corn future price forecasting is designed. This framework takes into account multiple factors contributing to corn price volatility, including supply and demand dynamics, policy adjustments, international market shocks, global geopolitical risks, and investor concerns within the corn market. During the data processing stage, complete ensemble empirical mode decomposition with adaptive noise (CEEMDAN) is utilized to thoroughly explore the volatility characteristics of historical corn future prices. Additionally, a convolutional neural network (CNN) is employed to extract essential forecasting information from corn news data. To enhance interpretability, a novel JADE–TFT interpretable corn future price prediction model is proposed. This model combines adaptive differential evolution with optional external archiving (JADE) to intelligently and efficiently optimize the parameters of the temporal fusion transformers (TFTs). Furthermore, in the empirical study, the introduction of a global geopolitical risk coefficient, Baidu indices such as “corn” and “corn price,” and quantized corn news text features is shown to improve the accuracy of corn future price predictions. The proposed corn future price prediction framework contributes to the healthy development of the global grain futures market, thereby fostering the growth and well‐being of enterprises involved in the grain industry.

Geopolitical risk, financial development, and renewable energy consumption: empirical evidence from selected industrial economies.

The rapid rise in climate and ecological challenges have allowed policymakers to introduce stringent environmental policies. In addition, financial limitations may pose challenges for countries looking to green energy investments as energy transition is associated with geopolitical risks that could create uncertainty and dissuade green energy investments. The current study uses PTR and PSTR as econometric strategy to investigate how geopolitical risks and financial development indicators influence energy transition in selected industrial economies. Our findings indicate a non-linear DCPB-RE relationship with a threshold equal to 39.361 in PTR model and 35.605 and 122.35 in PSTR model. Additionally, when the threshold was estimated above, financial development indicators and geopolitical risk positively impacts renewable energy. This confirms that these economies operate within a geopolitical context, with the objective of investing more in clean energy. We report novel policy suggestion to encourage policymakers promoting energy transition and advance the sustainable financing development and ecological sustainability.

Cross-domain dynamics: How geopolitical and climate policy uncertainties shape tourism patterns in the United States

Predicting tourism demand is crucial for policymakers and stakeholders in the tourism industry, enabling them to enhance promotional strategies, optimize marketing efforts, align investments, and achieve operational efficiency. While existing research has highlighted the negative impact of global risk factors such as geopolitical risks, economic policy uncertainty, and climate changes on tourism demand, the specific influence of climate policy changes and their differential impact on tourist arrivals has been less explored. Addressing this gap, our study employs bivariate, multiple, and partial wavelet methods to analyze the differential impact of climate policy uncertainty and geopolitical risk on tourism arrivals in the United States. Utilizing recent monthly data from January 1996 to August 2022, we uncover significant time-frequency varying dependencies between these factors and tourism demand. Our causality analysis reveals that both geopolitical risk and climate policy uncertainty are key determinants of tourism demand in the U.S. Furthermore, the Nonlinear Autoregressive Distributed Lag model corroborates the findings of the wavelet analysis, highlighting asymmetrical interactions in the long run. These findings offer valuable insights and have significant implications for policymakers and industry stakeholders, suggesting the need for adaptive and responsive tourism strategies that consider the evolving landscape of geopolitical and climate policy uncertainties.

Operational Risk Management in Banks: A Bibliometric Analysis and Opportunities for Future Research

The last few years have witnessed tremendous challenges in the management of operational risks faced by banks and the emergence of newer risks. The working models for bank staff are now different; additionally, there has been a massive increase in the digitization level. All these aspects make operational risk management in banks an attractive field of study. There is a need to perform systematic bibliometric analysis in this research area, providing the various trends and highlighting areas for further research analysis. This research paper has examined the various aspects of operational risk management in Banks by performing a thorough bibliometric analysis of 676 articles extracted from two data databases, i.e., Scopus and Web of Science, from 2010 until March 2023. These were analyzed using the tools Biblioshiny and VOSviewer. Various bibliometric techniques like analysis of trends, citations, contributing authors, keywords, and bibliographic coupling have been performed. This research paper has significant theoretical and practical implications which can assist future researchers. Operational risks are ever-dynamic, and five themes, i.e., climate risk, information security risks, geopolitical risks, third-party risks and compliance risks, have been identified in this research paper as key focus areas for conducting research in the future. The findings of this study and suggestions for future research will be useful to academicians, policymakers, and operational risk management professionals for identifying potential areas of collaboration in the future to strengthen the operational risk management framework.

Rethinking the environmental Kuznets curve hypothesis across 214 countries: the impacts of 12 economic, institutional, technological, resource, and social factors

Research over the past three decades has provided rich empirical evidence for the inverted U-shaped EKC theory, but current problems facing advancing climate mitigation actions require us to re-examine the shape of global EKC rigorously. This paper examined the N-shaped EKC in a panel of 214 countries with 12 traditional and emerging variables, including institutions and risks, information and communication technology (ICT), artificial intelligence(AI), resource and energy use, and selected social factors. The two-dimensional Tapio decoupling model based on N-shaped EKC to group homogeneous countries is developed to explore the inter-group heterogeneous carbon emission effects of each variable. Global research results show that the linear and cubic terms of GDP per capita are significantly positive, while the quadratic term is significantly negative, regardless of whether additional variables are added. This means the robust existence of an N-shaped EKC. Geopolitical risk, ICT, and food security are confirmed to positively impact per capita carbon emissions, while the impact of composite risk, institutional quality, digital economy, energy transition, and population aging are significantly negative. The impact of AI, natural resource rents, trade openness, and income inequality are insignificant. The inflection points of the N-shaped EKC considering all additional variables are 45.08 and 73.44 thousand US dollars, respectively. Combining the turning points and the calculated decoupling coefficients, all countries are categorized into six groups based on the two-dimensional decoupling model. The subsequent group regression results show heterogeneity in the direction and magnitude of the carbon emission impacts of most variables. Finally, differentiated carbon emission reduction strategies for countries in six two-dimensional decoupling stages are proposed.

Does the impact of geopolitical risk on leverage vary based on executives’ cash compensation?

ABSTRACT This study explores how the relationship between geopolitical risk and firms’ debt ratio is moderated by the level of executives’ cash compensation. The study shows that firms with higher levels of executive cash compensation dampen the adverse effects of geopolitical risk on their debt ratios. These results remain robust across various measures of capital structure and estimation methods, highlighting the importance of executive pay structures in shaping firms’ responses to geopolitical risk.

Global uncertainties, geopolitical risks and price exuberance: Evidence from international energy market

AbstractThe interaction of global uncertainty and geopolitical risks with energy price fluctuations has remained a critical global issue. This interaction can impact several regions' macroeconomic performance and welfare by making fundamental energy price forecasting more difficult, which may lead to exuberant behaviour. To help producers, consumers, and regulators make informed decisions in the face of volatile and uncertain energy markets, it is critical to highlight how these uncertainties influence price exuberance. In this light, this study examines the impact of global uncertainty and geopolitical risks on international energy price exuberance using monthly data from January 1990 to October 2022. The study employs supremum augmented Dickey–Fuller (SADF) and generalised augmented Dickey–Fuller (GSADF) tests to identify energy price exuberance. Firstly, consistent with exuberant behaviour, the tests identify seven episodes of explosive behaviour in the international energy prices within the sample. Secondly, this study applies the Logit model to estimate the impact of global uncertainty and geopolitical risks on price exuberance. The estimates suggest that the heightening of global uncertainty may deflate the price exuberance. This study also observes that adverse geopolitical risks (threats and acts) in the world and Ukraine amplify the likelihood of price exuberance in the market. However, adverse geopolitical risk (GPR) in Russia negatively impacted the formation of price exuberance. This finding implies that policymakers can use global uncertainty and geopolitical risks as early warning indicators of probable price exuberance in the international energy market. The findings also indicate the need for a buffer system and safe passage for the flow of energy supply in a geopolitical conflict or a major global event. The study further shows the need for a coordinated effort in innovation, research, and development to enhance energy efficiency and minimise reliance on fossil fuels, which these uncertainties may not significantly influence.

Interplay Multifractal Dynamics Among Carbon Trading Market, Geopolitical Risk and Economic Policy Uncertainty

This paper explores the variations in cross-correlations among the carbon trading market, geopolitical risk (GPR) and economic policy uncertainty (EPU), focusing on their multifractality and asymmetric properties. Therefore, the study employs the multifractal detrended cross-correlation analysis (MF-DCCA) and multifractal asymmetric detrended cross-correlation analysis (MF-ADCCA) approaches to examine these relationships from a three-dimensional perspective. Also, the study looks into cross-correlations at different phases of carbon trading. Our findings reveal that the multifractal cross-correlations between the carbon trading market and GPR or EPU exhibit anti-persistence and asymmetry. The anti-persistent cross-correlations are notably stronger when GPR experiences a downtrend or when EPU undergoes an uptrend. Furthermore, distinct fluctuation patterns emerge across various trends and scales on Hurst surfaces. In the short term, the carbon trading market exhibits heightened sensitivity to changes in GPR or EPU when they rise or fall. The cross-correlations remain multifractal, anti-persistent and asymmetric across different stages of carbon trading. Notably, the multifractality of cross-correlations is most pronounced for the series pair EUA/GPR in Phase II and for the series pair EUA/UK EPU in Phase III and Phase IV. Except for the series pair EUA/UK EPU in Phase II, the anti-persistent cross-correlations are more pronounced during uptrend than downtrend for the other series pairs. Moreover, the series pair EUA/UK EPU exhibits the highest degree of asymmetry at all stages.

Connectedness between sustainable exchanged‐traded funds in the presence of the Ukrainian war: Does political risk matter?

AbstractThis paper analyses the connectivity between geopolitical risk (GPR) and several segments of exchanged‐traded funds, aligned with the United Nations Sustainable Development Goals (SDGs), in order to understand the implications of risk associated with wars, political tensions and terrorist acts in the dynamics generated by this type of asset. We studied the behaviour of assets representative of 6 SDGs and 2 GPR indices, over a period of approximately 14 and a half years, characterized by several market phases, with special emphasis on the pandemic crisis and the war in Ukraine. Resorting to dynamic analysis, based on several multivariate models, it was possible to identify spillover effects in phases corresponding to turbulence in financial markets, in particular in the downward movements of prices of sustainable assets, generated from the geopolitical threat index. The results obtained are relevant for understanding the effect of GPR on sustainable investment, being of interest to various market actors.

How would the war and the pandemic affect the stock and cryptocurrency cross-market linkages?

This paper studies the cross-market linkages between six international stock markets and the two major cryptocurrency markets during the Covid-19 pandemic and the Russian invasion of Ukraine. By employing the local (partial) Gaussian correlation approach, we find that during the Covid-19 pandemic period, both cryptocurrency markets possess limited diversification and safe haven properties, which further diminish during the war. Bootstrap tests for contagion suggest that during the Covid-19 pandemic, the East Asian markets lead the transmission of contagion towards the two cryptocurrency markets. During the Russian invasion, the US stock market emerges as the principal transmitter of contagion. Uncovering the role of pandemic (Infectious Disease EMV Index) and geopolitical risk (GPR index) induced uncertainties, we find that under conditions of high uncertainty and falling prices, the dependency between the US and UK stock markets with both cryptocurrency markets increases considerably. The latter is more profound during the Russian–Ukrainian conflict. Our findings are useful for investors in their search for understanding the differences in asymmetric connectedness between markets during extreme events.

Macau hotel industry’s response to global shocks

This study examines the Macau hotel industry’s response to global shocks using vector autoregression analysis. According to the findings, the hotel occupancy rate reacts negatively to a one-standard-deviation shock in global geopolitical risk. However, this reaction decreases after the second period and completely loses its effect after the fourth period. Hotel occupancy rate responds weakly and short term negatively to the shock of global economic policy uncertainty. The hotel industry reacts short term, weakly, and positively to a shock in US monetary policy uncertainty. According to the variance decomposition results, at the end of the tenth term (long-term), 96.25% of the change in hotel occupancy rates is explained by their own dynamics. The rest is 3.00% geopolitical risk, 0.5% US monetary policy uncertainty, and 0.25% economic policy uncertainty.

The dynamic volatility nexus of geo-political risks, stocks, bond, bitcoin, gold and oil during COVID-19 and Russian-Ukraine war.

We investigate the dynamic volatility connectedness of geopolitical risk, stocks, bonds, bitcoin, gold, and oil from January 2018 to April 2022 in this study. We look at connectivity during the Pre-COVID, COVID, and Russian-Ukraine war subsamples. During the COVID-19 and Russian-Ukraine war periods, we find that conventional, Islamic, and sustainable stock indices are net volatility transmitters, whereas gold, US bonds, GPR, oil, and bitcoin are net volatility receivers. During the Russian-Ukraine war, the commodity index (DJCI) shifted from being a net recipient of volatility to a net transmitter of volatility. Furthermore, we discover that bilateral intercorrelations are strong within stock indices (DJWI, DJIM, and DJSI) but weak across all other financial assets. Our study has important implications for policymakers, regulators, investors, and financial market participants who want to improve their existing strategies for avoiding financial losses.

Geopolitical risk, CEO power, and corporate lobbying: Do powerful CEOs lobby more?

We offer fresh empirical evidence on the impact of geopolitical risk (GPR) on corporate lobbying behavior. Using a US sample, we show that firms, on average, scale down their lobbying expenditures when global and US-specific GPR increase. Geopolitical acts have a more negative impact than geopolitical threats. These outcomes remain resilient after controlling for firm-level political action committee (PAC) campaign contributions. Utilizing matched samples, we further show that CEO power moderates this effect, implying that firms with powerful CEOs lobby more when geopolitical risks are high. Finally, we demonstrate that firms with powerful CEOs that intensify their lobbying efforts exhibit stronger financial performance during geopolitical crises. Our findings are consistent with the stewardship perspective of CEO behavior.