Geopolitical Risk Research Articles

Research on safe-haven currencies under global uncertainty —A new perception based on the East Asian market

The backdrop of this research is the high global uncertainty that has amplified the demand for safe-haven assets, particularly in the East Asian market. This paper redefines the concept of a “safe-haven” currency to align with contemporary geopolitical and trade policy uncertainties, diverging from the traditional volatility index (VIX) risk measure. We investigate the risk aversion properties of East Asian currencies under these nonmarket risks using dynamic heterogeneous panel data analysis and robustness checks with double machine learning. Empirical results reveal that no East Asian currency qualifies as a safe haven under geopolitical risk and trade policy uncertainty. However, the Japanese yen (JPY) maintains its status under the VIX indicator. This study highlights the insufficiency of traditional safe havens like the JPY and underscores the importance of considering nonmarket risks, challenging the effectiveness of traditional investment strategies amid modern geopolitical and policy uncertainties. The findings suggest that investors should prioritize nonmarket risks and call for reform in the global monetary system to enhance currency resilience. The novel methodological approach to evaluating safe-haven currencies addresses the need for diversified currency portfolios to mitigate nonmarket risks.

Navigating the environmental impact of geopolitical risk and economic policy uncertainty: Evidence from load capacity curve hypothesis in BRICST economies

AbstractGlobal warming, climate disruptions, and environmental challenges are significant concerns in the present era, placing socioeconomic burdens on nations globally as humanity progresses at an unprecedented pace. In this framework, the load capacity factor (LCF) has evolved to demonstrate the environment‐damaging behavior of the population and nature's reaction to such damage. Thus, improving LCF by economies has become crucial for attaining the sustainable development goals (SDGs). In doing so, the current study scrutinizes the influence of geopolitical risk (GPR), economic policy uncertainty (EPU), economic growth (EG), renewable energy consumption (REC), natural resource rent (NRR), and financial development (FD) on LCF in BRICST economies during 1990–2020. We use the panel quantile regression (PQR) technique for empirical outcomes. The PQR technique can capture the heterogeneous role of explanatory factors. The empirical results of the PQR method validate the U‐shaped LCC hypothesis through the non‐linear evaluation of EG and LCF. Furthermore, results reveal that GPR, EPU, and FD adversely affect environmental quality. However, REC and NRR's supportive role in improving LCF is found. Keeping in view these empirical results, the study suggests an extensive policy framework for attaining the objectives of SDG 13 (climate change), SDG 08 (decent work and economic growth ), SDG 16 (peace for sustainable development), SDG 12 (responsible consumption and production), and SDG 07 (clean energy) in BRICST economies.

Does Geopolitical Risk Matter for Cross‐Industry Risk Contagion: The Roles of Real Linkage and Information Channels*

AbstractUsing data from 34 Chinese industries from January 2007 to February 2024, we examine risk spillover in the economic system and the channels through which geopolitical risk (GPR) influences contagion effects. Risk spillover measurements are calculated for both the short and long term by combining variational mode decomposition with the variance decomposition of vector autoregression. Our findings provide evidence of significant and time‐varying spillovers among industries over time. The results on densities and assortativity coefficients indicate the presence of structural changes in the risk network during geopolitical crises. Furthermore, we find that the real linkage (input–output nexus) is an important determinant of long‐term spillovers during periods of high GPR, and the information channel (market sentiment) is associated with risk contagion caused by GPR in both the short and long term. Overall, this paper offers valuable insights to prevent and mitigate the negative consequences triggered by geopolitical events on the stability of the economic system.

The Commercial Importance of the Suez Canal in the Context of the Crisis of Economic Globalization and Modern Geopolitical Risks

Aim. To substantiate the regularity of the violation of commercial navigation along the Suez Canal in the context of the crisis of economic globalization and the reformatting of the international order.Tasks. To find out the main prerequisites for the decline of the global transport and logistics infrastructure. To specify the reasons for the violation of navigation in the Red Sea. To show the impact of the decline in cargo transportation through the Suez Canal on the global economy.Methods. In order to achieve the stated purpose of the study, the following methods were used: historicism, which allowed to establish the sequence of crisis manifestations during the operation of the Suez Canal; extraction of relevant information from media materials and its subsequent analysis, which showed the geo-economic importance of the Red Sea area for world navigation, the scale of disorganization of transport communication through the Suez Canal; structural and functional analysis, which contributed to the establishment of the importance of transport logistics in ensuring the smooth functioning of the global economy; a rational choice that brought the authors closer to understanding the motives of the behavior of economic and political actors in the conditions of disorganization of cargo transportation through the Red Sea.Results. The analysis of the main prerequisites for reformatting global transport logistics has been carried out. It is shown that the decline of shipping in the Red Sea is conditioned by the crisis of economic globalization and increased geopolitical risks. The reasons for the violation of navigation in the Red Sea have been established. The impact of the disruption of cargo transportation through the Suez Canal on the global economy has been revealed.Conclusions. The destabilization of global transport routes through the Red Sea seems logical. It is obviously conditioned by the slippage of the neoliberal economic mechanism and the increasing geopolitical competition of Western countries with new centers of economic and political influence. Wars in the Middle East continue to have a destructive impact on the functioning of the global economy. The decline in cargo transportation leads to further disintegration of the previously established global markets. Global shipping companies have taken care of finding safer cargo movements. Producers and consumers of goods and services are forced to look for new partners within national and regional spaces, create new and activate existing transport corridors, which implies increased protectionism, and, therefore, leads to undermining the foundations of the global economy and the unipolar world.

Global, local, or glocal? Unravelling the interplay of geopolitical risks and financial stress

Since the start of the previous decade, regionalization of trade and investment flows has led to complex coupling in local (country-level) and global risks. To-date, little is known about how global uncertainty interacts with local uncertainty across the financial systems. Our study investigates the nexus between global and country-specific Geopolitical Risks (GPRs) and financial stress index (FSI) in five highly-open, large developed economies. We employ the cross-quantilogram and cross-spectral quantile coherency approaches on weekly data over 2000–2022 to show heterogeneous dependency of local and global geopolitical uncertainty on the financial stress conditions. Specifically, our results show that in the U.S. and the UK dependency of local and global geopolitical uncertainty on the financial stress conditions is influenced by the varying market conditions. In contrast, Canadian FSI is intensified by both global and country-level geopolitical risks, whereas German and French financial systems exhibit significant resilience to the global and local geopolitical shocks. Hence, the latter markets show hedging properties vis-a-vis global geopolitical risks.

Morocco's green shield: ESG stock performance under global climate, economic, geopolitical and oil uncertainties

This study employs the Nonlinear Autoregressive Distributed Lag (NARDL) model to explore the dynamics of the Moroccan Environmental, Social, and Governance stock market (MASI ESG), considering the influence of global factors, including oil price (Brent), Global Economic Policy Uncertainty (GEPU), geopolitical risk (GPR), and climate policy uncertainty (CPU).A significant positive relationship between MASI ESG and Brent is identified, attributed to Morocco's energy import reliance. Increasing oil prices incentivize sustainable practices, thereby enhancing ESG performance. Conversely, GEPU negatively impacts MASI ESG in the long term, discouraging investors during economic uncertainties, posing a threat to ESG's sustained viability. The study unveils a nuanced relationship between GPR and ESG performance, where geopolitical risk exhibits a dual nature, presenting challenges during long-term turmoil but potentially boosting confidence amid short-term fluctuations.While initially insignificant, CPU demonstrates a sustained positive relationship with MASI ESG over time, emphasizing the growing significance of climate-conscious strategies for long-term ESG performance. We evince the potential of the Moroccan ESG market to contribute to a sustainable future by attracting responsible investments and fostering sustainable business practices. By overcoming challenges and embracing innovation, the Moroccan ESG market can emerge as a model for other developing countries striving for sustainable economic growth.

Exploring the nexus of geopolitical risk, green financing, and natural resource rents: A study of Russia's economic growth

Geopolitical risk encompasses various uncertainties arising from political, social, and economic factors, which can significantly influence a country's economic performance. Therefore in this study we analyzed the impact of geopolitical risk (GPR), green financing, and natural resource rents (NRR) on Russia's economic growth during 2000–2022 is examined in this study. The collected data is analyzed using simple quantile regression, the ADF unit root test, Johansen Co-integration, and other time series methods. A unit root test shows that level (1) data is stable and that variables are co-integrated. Quantile regression research shows that GPR positively impacts economic growth at the median and higher quantiles. In addition, green finance and commerce boost economic growth across all quantiles. The results support the resource curse hypothesis, which claims that NRR negatively affects economic growth. The Granger causality test shows that GDP and its explanatory components are causally related. These findings were compatible with quantile regression estimates after a parametric examination. The policy implications for researchers and politicians concerned with green finance, natural resource sustainability, and geopolitical dangers to economic growth are significant.

The impact of geopolitical risk and COVID-19 pandemic stringency on Sukuk issuance in Malaysia

The impact of geopolitical risk and COVID-19 pandemic stringency on Sukuk issuance in Malaysia

Geopolitical risk hedging or timing: Evidence from hedge fund strategies

An increasing number of investors are concerned about how they can diversify risks and profits amid surging geopolitical uncertainties. Using a geopolitical risk timing/hedging model, we investigate whether hedge fund managers can effectively hedge or time geopolitical risks by adopting different trading strategies. We find that excluding those in the global macro category, hedge funds with higher minimum investments and management fees exhibit greater success in hedging geopolitical risks. Meanwhile, global macro hedge funds, which have longer lockup periods, are more adept at timing geopolitical risks by increasing their market exposures. Furthermore, hedge funds which are the top geopolitical risk hedgers and timers demonstrate higher economic value than those in the bottom group over the subsequent one and three months. Our findings provide valuable insights into private investors’ selection of hedge funds during periods of heightened geopolitical risk.

Climate and geopolitical risk correlations and response decisions for semiconductor global supply chains

Threats from climate risk (CR) and geopolitical risk (GR) undermine the resilience of the Semiconductor Global Supply Chain (SGSC). Plenty of company profit has plummeted due to the chip supply disruptions and delays. Particularly, the complex risk correlations (RCs) in a multi-project environment, and the inter-entity relationships, render the risk analysis and risk response decisions (RRDs) within CR and GR challenging. To address the problem, this study proposes a novel three-stage approach to explore the impact of CR and GR and obtain RRDs. First, based on the actual operation of SGSC, a system dynamics model of the RCs is conducted to analyze the effects of CR and GR. Second, a Stackelberg game model is formed based on the project interdependencies to find the optimal response resources and profit considering the inter-entity relationships. Third, a binary optimization model constrained in the optimal response resources is developed to determine RRDs. From the simulation results and the numerical example, the proposed approach is a powerful tool for risk managers of SGSCs. The actionable recommendations on managing and responding to CR and GR are summarized. This study provides theoretical and managerial insights for resilient supply chain management.

Influence of Geopolitical Events on Procurement Strategies and Supply Chain Dynamics in Multinational Corporations

Purpose: The aim of the study was to examine the influence of geopolitical events on procurement strategies and supply chain dynamics in multinational corporations Methodology: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries. Findings: The study found that geopolitical events exert a profound influence on procurement strategies and supply chain dynamics within multinational corporations (MNCs), compelling them to adapt swiftly to global uncertainties. The study underscored that events such as trade conflicts, sanctions, and political instability disrupt established supply chains, necessitating strategic adjustments in sourcing, supplier relationships, and operational practices. MNCs respond by diversifying sourcing locations, enhancing supply chain transparency, and integrating robust risk management frameworks to mitigate geopolitical risks effectively. Unique Contribution to Theory, Practice and Policy: Institutional Theory, Resource Dependence Theory & Transaction Cost Economics (TCE) may be used to anchor future studies on influence of geopolitical events on procurement strategies and supply chain dynamics in multinational corporations. Encourage MNCs to adopt agile procurement strategies that prioritize flexibility and responsiveness to geopolitical disruptions. This includes establishing multi-sourcing strategies, leveraging local suppliers, and implementing digital platforms for real-time risk monitoring and decision-making. Strengthen supplier relationship management practices to build resilient supply networks. Foster transparent communication and collaboration with suppliers to co-develop contingency plans and mitigate supply chain risks arising from geopolitical events. Advocate for transparent and stable trade policies that reduce uncertainty and facilitate global supply chain operations. Engage in constructive dialogues with policymakers to address trade barriers, tariffs, and regulatory inconsistencies that hinder cross-border trade and procurement efficiency.

Geopolitical risk and cash holdings: evidence from an emerging economy

Purpose This study aims to examine the influence of geopolitical risk (GPR) on corporate cash holdings in an emerging market, India. It also investigates whether the effect of GPR on cash holdings varies across financially constrained and unconstrained firms, and across the different sectors. Design/methodology/approach This study uses the fixed-effect regression model to examine the effect of GPR on the corporate cash holdings of 2090 Indian firms from 2003 to 2021. To correct the potential endogeneity issue and ensure the robustness of the results, this study uses two-stage least squares regression, alternative cash holdings proxies, GPR measures and across the different periods (Global financial crisis and COVID-19). Findings The paper finds that GPR has a positive impact on the cash holdings of Indian firms. The authors also find that the positive relationship between GPR and cash holdings is consistent for financially constrained and unconstrained firms. Furthermore, the results also show that firms in the construction sector maintain higher cash reserves than other sectors. Originality/value To the best of the authors’ knowledge, this study is one of the first-ever studies which examines the effect of GPR on corporate cash holding for an emerging economy like India. The use of alternative measures of cash holding, GPR, and estimation methods make this study more robust.

The higher-order moments connectedness between rare earth and clean energy markets and the role of geopolitical risk:New insights from a TVP-VAR framework

Against the backdrop of escalating geopolitical risks, the interdependence between rare earth and clean energy markets are crucial for cross-market investors and regulators. However, previous research has not adequately examined the higher-order moment connections between these markets. This study addresses this gap by integrating GRACHSK and TVP-VAR methods to explore the asymmetric and tail risk connectedness between rare earth and solar, wind, nuclear, and electric vehicle markets. Further, we investigated how geopolitical risks impact these connections over time. The results reveal significant higher-order moment connectedness between the clean energy and rare earth markets, each serving as an exporter and receiver, respectively. Among these, wind energy and solar energy exhibit significant net spillovers of skewness and kurtosis to rare earths. These high-order moment spillovers are time-varying and exacerbate during major geopolitical crises, such as the COVID-19 pandemic and the Russian-Ukraine war. The portfolios with minimum connectedness are effective at hedging extreme risks, particularly in terms of kurtosis. It implies that portfolios constructed based on higher-order moments can better hedge against extreme risks. GPR exacerbates higher-order moment spillovers between rare earth and clean energy markets in the short- and medium-term. In particular, the impulse response of kurtosis spillovers to GPR shocks shows prominent and frequent fluctuations, indicating that extreme risk spillover effects with significant lag effects would rapidly diffuse across various markets when geopolitical risks occur. The research findings contribute to three aspects: First, the connectedness analysis offers a network and dynamic perspective on extreme risk management between rare earth and clean energy markets. Second, higher-order moments can enhance the returns of diversified cross-market investment portfolios. Third, the conclusions aid in understanding the evolving patterns of rare earth and clean energy markets under geopolitical risk events, facilitating timely investment and regulatory strategies.

Heterogeneous impacts of geopolitical risk factors on stock markets in the Middle East: A quantile regression analysis across four emerging economies

This study investigates the heterogeneous impacts of eight categories of geopolitical risk on stock market performance across different market conditions in four Middle Eastern economies: Egypt, Israel, Saudi Arabia, and Turkey. Utilizing Quantile regression analysis and datasets spanning from September 2002 to August 2023, our findings reveal the complex and varied relationships between geopolitical risk factors and stock market performance. These results underscore the significance of comprehending specific political risk factors and their influence under various market conditions. We observe a consistent negative relationship between military buildups and stock market performance in Egypt and Israel, while other categories exhibit mixed effects. The Saudi Arabian and Turkish markets demonstrate varied sensitivity to different risks, with terrorism and war-related events significantly affecting market dynamics. Notably, all four markets consistently displayed negative reactions to terrorist activities, indicating the universally disruptive nature of such events. Understanding these dynamics assists investors and policymakers in adapting to global political changes.

Quantifying Fiscal Multipliers in South Africa: A Structural Var Approach

Fiscal multipliers have deteriorated in South Africa since the global financial crisis in 2008 and 2009. Weakening fiscal multipliers to a record low of zero has constrained the government’s ability to use fiscal policy measures to stimulate the economy, particularly in the aftermath of the COVID-19 pandemic and recent geopolitical risks affecting the global economy. The current paper quantifies fiscal multipliers in South Africa. The study employed the structural vector autoregressive to quantify government spending and government tax revenue fiscal multipliers in South Africa over the period 2000M01–2023M10. The control variables for the study are government total spending, total government tax revenue, and the production index as a proxy variable for economic activity. This is the first study to employ high-frequency monthly data, which increases the number of observations, thus yielding significant and robust results. The accumulated government expenditure and government tax revenue multipliers are 0.4 and 0.1, respectively. The empirical results are consistent with the Keynesian view that government spending, particularly investment spending, fosters economic growth. Structural reforms in logistics, the energy sector, and education to boost economic growth and improve fiscal multipliers that are currently less than one in South Africa must be adopted as a policy response.

Airline stock market performance and political relations: A cross-quantilogram analysis of Chinese and US carriers

This study focuses on examining the quantile dependence and directional predictability between airline stock returns and various political variables, including the US-China political relations, geopolitical risks, and partisan conflicts. To achieve these goals, a novel cross-quantilogram method is employed. The findings reveal that directional predictability is more pronounced when airline stock returns and the political environment experience extreme conditions. In addition, the US partisan conflicts index exhibits a more substantial influence on the dependence structure than the indexes of Sino-US political relations and geopolitical risks. Moreover, similarities are observed in the behavior of US airline stock returns given partisan conflicts and geopolitical risks. Finally, policy implications are provided.

Can Economic, Geopolitical and Energy Uncertainty Indices Predict Bitcoin Energy Consumption? New Evidence from a Machine Learning Approach

This paper explores the predictive power of economic and energy policy uncertainty indices and geopolitical risks for bitcoin’s energy consumption. Three machine learning tools, SVR (scikit-learn 1.5.0),CatBoost 1.2.5 and XGboost 2.1.0, are used to evaluate the complex relationship between uncertainty indices and bitcoin’s energy consumption. Results reveal that the XGboost model outperforms both SVR and CatBoost in terms of accuracy and convergence. Furthermore, the feature importance analysis performed by the Shapley additive explanation (SHAP) method indicates that all uncertainty indices exhibit a significant capacity to predict bitcoin’s future energy consumption. Moreover, SHAP values suggest that economic policy uncertainty captures valuable predictive information from the energy uncertainty indices and geopolitical risks that affect bitcoin’s energy consumption.

Effects of adverse geopolitical risk on price bubbles contagion from European natural gas prices to international energy prices

PurposeThe recent Russia–Ukraine conflict highlights the geopolitical importance of natural gas, especially in Europe. In this light, this study examines the impact of the Russia–Ukraine conflict on the spread of price bubbles from European natural gas to international energy prices.Design/methodology/approachThe Generalized Supremum Augmented Dickey-Fuller (GSADF) test is employed to detect the occurrence of price bubble episodes while the Dynamic Logit Model is used to examine price bubble contagion between the two markets. Further, a tri-variate VAR model is used to examine the determinants of the price bubble.FindingsThe findings reveal multiple bubble episodes in both European natural gas and international energy prices. Further, evidence of bilateral contagion between European natural gas and the international energy market is found. In addition, the Russia–Ukraine conflict triggers price bubble episodes in both markets. Finally, a counterfactual analysis suggests that the conflict increases the bubble contagion from the European natural gas market to the international energy market by about 40%. These findings imply that the Russia–Ukraine conflict is a significant driver of high upside risks to bubble occurrence and subsequent contagion to both European natural gas and international energy prices.Originality/valueTo the best of our knowledge, this study contributes new empirical evidence that the Russian–Ukrainian conflict significantly impacts the spread of price bubbles from the European natural gas market to international energy markets.

Volatility dynamics of agricultural futures markets under uncertainties

The objective of this study is to examine the effect of various uncertainty measures on the realized volatility of agricultural futures markets. In doing so, we use a range of uncertainty indicators in our analysis to investigate whether news-based uncertainty measures (e.g., geopolitical risk and economic policy uncertainty) have better predictive contents than the market-based uncertainty measures (e.g., crude oil volatility index, the US equity market VIX and exchange rate VIX). This comparison is important given that employing both measures has some specific benefits. Methodologically, we consider the application of the LASSO (least absolute shrinkage and selection operator) method as well as the heterogenous autoregressive (HAR) process. The in-sample estimates indicate that among the various news-based and market-based risk measures the latter provide better forecasts for the realized volatility of agricultural futures markets. The out-of-sample forecasts also confirm the same with the LASSO method outperforming the HAR process.

Monetary policy and uncertainty spillovers: Evidence from a wavelet and frequency connectedness analysis

Interconnected financial markets, especially those stemming from changes in monetary policy or shifts in financial, political, or geopolitical conditions, ease the transmission of spillovers. Understanding these dynamics is crucial for policymakers and investors. Therefore, identifying cross-country spillovers across time and frequency domains, along with assessing the role of monetary policy during periods of economic instability and escalating geopolitical risk, holds significant importance. This study contributes to the literature by revealing important aspects of network connectedness among monetary policy and uncertainty indices, in terms of frequency and time horizon, for the US and the UK, over the period 2014–2023. First, we find stronger interdependence between the series in the long term, with short-medium run connectedness prevailing during specific periods and events, such as Brexit, the COVID-19 pandemic, and the Russian-Ukrainian War. Second, shadow short rates often receive spillovers from financial stress in the short-medium term but transmit spillovers in the long term, implying the stabilizing influence of monetary policy in the long run. Third, geopolitical risk is responsible for most of the spillovers reflected in financial and economic uncertainty in 2022, and finally, the US emerges as the dominant transmitter of spillovers to the UK.