Global Geopolitical Risk Research Articles

Multi-faceted US uncertainty connectedness with domestic and global geopolitical risk

PurposeThis paper aims to explore the spillover impacts that domestic or global aspects of geopolitical risk generate on uncertainty. The latter is derived from a spectrum of different sources in the USA (economic policy, monetary policy, fiscal policy, national security, government spending, taxation) from 1985 up to November 2022.Design/methodology/approachVector autoregressive schemes are used to detect causality and reverse causality between each aspect of geopolitical risk and each source of US uncertainty.FindingsNotably, national security generates higher geopolitical risk by almost 8% in the first month but decreases GPR by 2% in the third month after the shock. USA is found to constitute a cornerstone as regards global peace and that the overall economic or monetary conditions or war status in the USA are remarkably more influential toward domestic and global geopolitical uncertainty than separate strands of fiscal policymaking. Reverse causality displays sizably weaker effects overall.Originality/valueThis study sheds light on the determinants of geopolitical risk and domestic instability by an international perspective and provides a compass for better decision-making for fiscal and monetary policymakers and market participants.

Spillover effects of geopolitical risks on global energy markets: Evidence from CoVaR and CAViaR-EGARCH model

This study investigated the spillover effects of geopolitical risks on energy (crude oil, coal and natural gas) markets. The empirical evidence is based on the CoVaR index and the CAViaR-EGARCH model. Results demonstrate that the spillover effects of geopolitical risks on the global energy market are nonlinear, asymmetric and time-varying. With each 1% rise in global geopolitical risks, the left tail risks in the crude oil, coal, and natural gas markets decreased by 0.179%, 0.119% and 0.113%, while the right tail risks increased by 0.144%, 0.135% and 0.097%, respectively. In addition, the magnitude of energy crises triggered by different geopolitical events varies. Lastly, the spillover effects of GPR on energy markets vary considerably across nations, with more substantial effects observed on average in BRICS than in G7 countries. The primary implication is to provide references for government and energy investors to avoid energy market risks timely.

Global geopolitical crisis and tourism development in the USA

ABSTRACT We analyze the effect of the global geopolitical crisis on tourism development using nonparametric causality-in-quantiles. We employ monthly data on tourism development (i.e. number of arrivals and receipts) and the global geopolitical crisis from January 1995 – December 2020. Various forms of global geopolitical crises significantly negatively impact USA tourism development. Furthermore, we conclude that the global geopolitical risk influence is subjective to the severity of the crisis, i.e. the more severe a crisis impacts tourism development more significantly. Our results are essential for tourism sector representatives and policymakers, as the global geopolitical crisis can negatively influence tourism receipts.

Does Geopolitics Affect the Development of China’s 5G Industry?

Does Geopolitics Affect the Development of China’s 5G Industry?

Global geopolitical risk and volatility connectedness among China's sectoral stock markets

Employing the time-varying parameter vector autoregressive (TVP-VAR) connectedness index and nonparametric causality-in-quantiles test, this paper investigates the causal effect of global geopolitical risk on the dynamic volatility connectedness within China's sectoral stock markets. The TVP-VAR connectedness index results reveal significant volatility connectedness among China's stock market sectors, and the industrial, consumer discretionary, and raw material sectors play a critical systemic role throughout the sample period. The Granger causality test results show that the causality-in-quantiles test demonstrates superior performance compared to the linear Granger causality test, and it is evident that global geopolitical risk exhibits significant nonlinear causality effects on both the overall volatility connectedness among sectors and the net volatility connectedness across different sectors.

Will geopolitical risks only inhibit corporate investment? Evidence from China

This paper uses data from Chinese listed companies to test the heterogeneous effects of China's local geopolitical risk (GPR_CHN) and global geopolitical risk (GPR) on Chinese corporate investments, as well as their economic mechanisms. The empirical results reveal that GPR_CHN primarily dampens corporate investment by increasing business operational risks and firms' cost of equity. Conversely, the inflow of international capital into China that results in a decrease in the cost of equity for listed companies, is the primary reason that GPR stimulates Chinese corporate investments. Furthermore, this paper tests the heterogeneous effects of global geopolitical threats (GPRT) and global geopolitical actions (GPRA) on corporate investment. Finally, we find that firm characteristics will influence the relationship between GPR and corporate investment in China.

Analysis of Bank Saving Growth Below IDR2 Billion in Indonesia

The COVID-19 pandemic, global economic shocks, and global geopolitical risks have resulted in the banking industry facing global uncertainty that affects both banks and customers. This uncertainty has grown significantly in recent years. This research examines the differences between the periods before and after the COVID-19 pandemic and the long-term and short-term effects of inflation, BI-7DRR, deposit rates, SBN yields, and the COVID-19 pandemic on DPK growth. The research utilizes the Difference Test and the Error Correction Model methodologies. The study reveals differences in DPK, BI-7DRR, deposit rates, and SBN yields before and during the COVID-19 pandemic. The findings indicate that inflation, BI-7DRR, deposit rates, and the COVID-19 pandemic have a long-term impact but do not exhibit a short-term impact. Meanwhile, SBN yield has no long-term or short-term effect on DPK growth. Inflation affects the growth of DPK in the long term because people see the direction of economic conditions. BI-7DRR has a long-term with DPK because banks require a time lag. The level of DPK does change in the long term because banks must adjust interest rates based on economic conditions. Increased savings in banks because people see the COVID-19 pandemic as a shock economy. Disclaimer: All views in this paper are the authors' and do not necessarily reflect the views of Indonesia Deposit Insurance Corporation (Lembaga Penjamin Simpanan).

Global geopolitical risk and inflation spillovers across European and North American economies

In this paper, we examine the spillovers across monthly inflation rates (measured by the CPI) of advanced North American and European economies. Using data covering the period from May 1963 to November 2022 and a time-varying spillover approach, we show that the total spillover index across the inflation rates spiked during the Russo-Ukrainian war, exceeding its previous peak shown during the 1970s energy crisis. Notably, we apply a quantile-on-quantile regression and reveal that changes in the total spillover index are positively associated with lagged changes in the global geopolitical risk (GPR) index. More specifically, changes in the GPR index are positively impacting all future changes in the inflation spillover index, whereas the GPR Acts index is only positively associated with large future changes in the inflation spillover index. Given that rising levels of inflation are posing risks to the financial system and economic growth, these findings should matter to the central banks and policymakers in advanced economies.

Promotion or hindrance? Exploring the bidirectional causality between geopolitical risk and green bonds from an energy perspective

This paper discusses the time-varying causalities between global geopolitical risk (GPR) and green bonds (GBs) from the energy market perspective, with a sample period of 2012:M10-2022:M09 and a rolling window subsample causality test. Oil prices and the investment, consumption and cooperation of renewable energy are considered important factors of the energy market. Empirical results show that GPR negatively affects GBs in three different subperiods. Tense geopolitical situations caused fluctuations in oil prices and reduced market participants’ interest in green bonds. On the other hand, the alleviation of GPR has promoted renewable energy cooperation and increased demand for green bonds. In contrast, GBs have both positive and negative effects on GPR. Green bonds guarantee the financial needs of energy transformation, enhance energy security, and lower GPR. However, competition for renewable energy resources will lead to new geopolitical conflicts. The time-varying heterogeneity for the causalities and the bidirectional intensity are clearly identified to provide new insights for existing theoretical research. Thus, understanding the causalities during subperiods is beneficial for market participants to make better decisions to prevent geopolitical conflicts and promote the development of the green bond market.

The impact of geopolitical risks on connectedness among natural resource commodities: A quantile vector autoregressive approach

This study examines the impact of global geopolitical risk on connectedness among major natural resource commodities. We implemented a Quantile Vector Autoregressive connectedness estimation approach from 5 January 2010 to 3 March 2023, including many geopolitical turbulences, such as the Russian-Ukrainian war. We found high connectedness under both extraordinarily high and low return conditions. The extreme return shocks in metals tended to spillover to energy commodities. The spillover index peaked during important economic, political, and financial developments. In addition, geopolitical risk drives connectedness among natural resources commodities under average market conditions. Our results may help investors with portfolio optimization and risk management practices and guide policymakers toward attaining financial market stability.

Sovereign credit and geopolitical risks during and after the EMU crisis

AbstractThis paper focuses on the sovereign crisis of the Euro debt crisis era, and we address the existence of the relationship of CDS and bond markets sovereign credit risk pricing for selected core and periphery EMU countries, during and after the 2009 EMU crisis. We study this relationship in conjunction to geopolitical risk as a measure of macroeconomic uncertainty. We use daily observations for several bond maturities and CDS premium with reference to the core (France and Germany) versus periphery EMU countries (Portugal, Italy, Ireland Spain, and Greece) for the period 2009 to 2014. To measure global geopolitical risk, we employ the Caldara and Iacoviello (2022) global geopolitics index (GPR). Using alternative econometric approaches, we find adequate evidence of volatility spillovers between the geopolitical risk index and sovereign risk markets mainly during the crisis period (2009–2012) and weaker during the easing of the eurozone debt crisis period (2012–2014). Moreover, based on Granger causality the estimation of the short‐ term dynamics reveals a significant linkage during the post‐crisis period rather than during crisis. During the crisis period, we found significant dynamic responses between GPR and bond yields.

Revisiting the oil prices–domestic food inflation nexus in Nigeria: the role of global geopolitical risk

PurposeThis study examines the influence of the global geopolitical risk (GPR) on the relationship between oil prices and domestic food prices under the augmented Phillips curve framework.Design/methodology/approachUsing monthly data on Nigeria from January 1995 to December 2021, the authors accommodate symmetry and asymmetry by adopting the linear and nonlinear autoregressive distributed lag, linear and nonlinear Granger causality tests.FindingsThe study establishes the positive and significant effects of both oil prices and GPR on food prices in the long and short run, though with a small magnitude in the short run. The asymmetric model shows that, while oil price shocks (positive and negative) exert a positive influence on food prices in the long-run, the effects of oil price shocks differ when accounting for GPR in the short-run. The coefficients of the interactive term, being the moderator of GPR between oil-food prices, are positively significant across models, suggesting that they jointly influence food prices when assuming linearity. The nonlinear model shows that the positive and negative components of interactive terms exert a positively significant influence on food prices, even though food prices tend to be more reactive to positive oil price shocks. The robustness checks show a unidirectional causal flow from oil prices and GPR to food prices under the linear and nonlinear models.Originality/valueThe authors examine the moderating effect of the newly developed global GPR index of Caldara and Iacoviello (2022) on the oil–food inflation relationship in Nigeria by applying the symmetric and asymmetric approaches.

Geopolitical Risk and Stock-Bond Interplay: A Comparative Study of Islamic and Conventional Assets in the GCC

ABSTRACT Undoubtedly, financial markets are not only affected by common economic, financial and behavioral factors but also by other global risk shocks. In this paper, we investigate the relevance of global geopolitical risk in stock-bond relationships. Specifically, we assess the possibility and manner in which time-varying correlations of Islamic stocks and bonds (sukuk) returns are affected by geopolitical risk and whether they behave differently from their conventional counterparts. We do so by implementing a multivariate GARCH model under dynamic conditional correlations (DCCs) to daily data of the Gulf Cooperation Council (GCC) markets (2013-2019). Our outcomes unveil that geopolitical risks positively affect the dependence between Islamic stocks and sukuk, as well as their conventional counterparts. Regional rather than global geopolitical risk factors positively affect the volatility of conventional stock-bond correlation, while the volatility of Islamic stock-sukuk correlation decreases during times of high geopolitical risks. Our findings offer several prominent implications in terms of financial stability, asset allocation of portfolios and policy design.

Do global geopolitical risks affect connectedness of global stock market contagion network? Evidence from quantile-on-quantile regression

Based on the Vector Autoregressive Model (VAR), this paper constructs a contagion complex network of global stock market returns, and uses the Quantile-on-Quantile Regression (QQR) to explore the impact of global geopolitical risks on the connectedness of global stock markets. By applying the risk contagion analysis framework, we depict risk contagion and correlation between financial markets in different countries. We also identify the risk contagion characteristics of international financial markets. This paper innovatively introduces the quantile-on-quantile regression method to the study of geopolitical risk. Through the quantile-on-quantile approach, we find that there is an asymmetric relationship between geopolitical risk and the global stock market correlation network. Our conclusions provide some suggestions for policy makers and relevant investors on how to deal with the current high global geopolitical risks. They also provide ideas on how to effectively hedge such risks during asset allocation and policy formulation.

Exploring the dynamic connectedness among energy transition and its drivers: Understanding the moderating role of global geopolitical risk

The recent Sustainable Development Goals (SDG) 2022 progress report shows the presence of a possible policy lacuna at the global level in achieving the objectives of SDG 7. The recent COP26 discourse and the academic literature identify the Energy Transition as the possible mean to achieve this objective. Now, realizing the Energy Transition requires a conducive policy climate within the economies, and this conduciveness comes from the financial, technological, and the broad policy dimensions. The existing policy discourse and academic literature show that the Green Financing, Green Technologies, and the Environmental Policies might be the possible drivers to achieve this Energy Transition. Nevertheless, the exposure of a nation to the Geopolitical Risks arising out of the global connectedness of nations might be a detriment to the energy transition process. Increase in the risk profiles and decline in the attractiveness of the energy transition projects might create a roadblock for the policy drivers of energy transition to exert their potential impacts. The present study aims at developing a policy framework by analyzing the dynamic association between the energy transition and its drivers, while allowing Geopolitical Risk to moderate the association. The study is conducted for January 1, 2016 to October 31, 2022, and has used a battery of advanced econometric methods (Quantile Vector Autoregression, Cross-Quantilogram, Wavelet Quantile Correlation, and Non-Parametric Granger-Causality tests). The results show that Green Financing, Green Technologies, and the Environmental Policies have positive impacts on Energy Transition, while Geopolitical Risk is found to have negative impact. The policy framework is designed in a phase-wise manner, so that the impacts of the Geopolitical Risk can be isolated, and the positive impacts of Energy Transition drivers can be maximized. The policy framework is made by keeping the attainment of SDG 7 in its core.

Spillover Effects among Electricity Prices, Traditional Energy Prices and Carbon Market under Climate Risk

With the increase in global geopolitical risks and the frequent occurrence of extreme climate in recent years, the electricity prices in Europe have shown large fluctuations. Electricity price has an important impact on the cost of production and living, while electricity demand will also affect other energy markets. A double-layer system based on the spillover effects from a systematic perspective is constructed in this paper to explore the connectedness between different electricity markets and other related energy markets in Europe, considering the impact of climate risks. The results show that there are certain spillover effects among electricity markets in different countries, with a temporary upward trend in the beginning of the Russia-Ukraine conflict, and the electricity markets in the UK and Germany have a more important role in Europe. There are two-way spillover effects between the electricity market and fossil fuel markets, carbon market and carbon emission. Since 2022, the electricity market is affected by gas prices, while it has a certain impact on carbon emissions. The heating degree day (HDD) has significant spillover effects on the electricity market and other energy markets, while the spillover effects of the cooling degree day (CDD) are relatively small.

Do Geopolitical Tensions and Economic Policy Uncertainties Reorient Mineral Imports in the USA? A Fat-Tailed Data Analysis Using Novel Quantile Approaches

Mineral resources are essential raw materials to generate electricity, fuel vehicles, and heat homes and workplaces. Besides, the global agenda of clean energy deployment, including solar photovoltaics (PV), wind turbines, electric vehicles (EV), and storage facilities, calls for a considerable volume of critical minerals, which elevates their respective import demands. This highly concentrated source of those minerals poses a significant concern triggered by the augmented geopolitical tensions and economic policy uncertainties. In light of this context, our objective is to estimate the response of mineral import demand to global geopolitical risk events and economic policy uncertainty covering monthly data from January 1996 to December 2020. In doing so, we apply the cross-quantilogram (CQ) and the quantile-on-quantile (QQ) regression approaches due to the fat-tailed nature of the data property. Besides, these quantile-based data analysis procedures are appropriate for non-normal data sets and show the co-movement of the variables of interest under a bi-variate modelling approach. More importantly, these two techniques also exhibit the quantile connectedness among the variables in the bearish and bullish conditions. Moreover, our findings show that mineral import demand responds negatively to the USA’s (own) and global geopolitical risk events at the high quantiles under long memory. In addition, this demand reacts positively to the USA’s (own) and global economic policy uncertainty in entire quantiles under long memory. Therefore, our policy suggestions are concerned with tackling geopolitical tensions and economic policy uncertainty by adopting pre-emptive measures within a viable institutional mechanism to continue impressive mineral trade flows.

The causal relationship between green finance and geopolitical risk: Implications for environmental management

This study investigates the time-varying causal relationship between geopolitical risk and green finance during the period of 1 March 2012–February 16, 2022. By using the novel time-varying causality testing framework, our findings shed light on the nexus between geopolitical risk and green finance in informing environmental management decisions. First, we find that time heterogeneity does exist in the causal relations between geopolitical risk and green finance. Second, geopolitical risk has a more prolonged impact on the volatility of green bonds and renewable energy than the return. Yet, geopolitical risk tends to influence the return of clean energy more persistently than volatility. Third, we observe that geopolitical risk has a more sustained impact on the return and volatility of renewable energy than clean energy. This might be due to the distinct nature of the production of clean energy and renewable energy, thereby providing implications for effective environmental management. Lastly, this paper demonstrates that the impact of geopolitical risk on the return of European clean energy has diminished since the onset of 2015. The volatility of the European clean energy sector is not affected by global geopolitical risk, underscoring the necessity of promoting the development of this sector to reduce the dependence on fossil fuels and enhance energy independence.

Global Geopolitical Risk and the Long- and Short-Run Impacts on the Returns and Volatilities of US Treasuries

ABSTRACT We examine the impact of global geopolitical risk (GPR) measures on US Treasuries’ returns and volatilities, differentiating between long- and short-run investment behaviours among an array of time-to-maturities ranging from 1 month to 30 years, taking into account various economic and financial factors. Using monthly data and a panel autoregressive distributed lag (ARDL) model, the results indicate a negative long-run relationship between US Treasuries’ returns and the global GPR index. These results generally hold when we consider geopolitical threats and geopolitical acts, although they exhibit some discrepancies between these two components and across the yield curve. Further results show a positive and strong long-run relationship between the US Treasuries’ realized volatilities and the various geopolitical risk measures. The evidence holds true when we disentangle ‘bad’ from ‘good’ realized volatilities, although the impact of bad volatility is stronger than that of good volatility, which points to an asymmetric effect of realized volatility in US Treasuries. A sub-sample analysis suggests the robustness of the main results. Our analyses provide the first empirical evidence of the information content of GPR for US Treasury securities’ returns and volatilities, which matters to fixed-income investors and decision-makers at the Federal Reserve.

Global and Country-Specific Geopolitical Risks and Exchange Rate Volatility: New Empirical Evidence from Indonesia

This paper investigates the conditional predictability of geopolitical risks (GPR) on the rupiah-dollar exchange rate volatility, using 447 monthly observations spanning January 1985 to March 2022. The paper utilizes asymmetric GARCH (1,1) combined with various asymmetric GARCH models, including the integrated GARCH (I-GARCH), the exponential GARCH (E-GARCH), and the threshold GARCH (T-GARCH), and the power asymmetric GARCH (A-PARCH). This study finds convincing evidence that GPRI has a consistent effect on exchange rate volatility, either symmetric GARCH models or asymmetric GARCH models. Interestingly, the global geopolitical risks (GPR) heterogeneously affect the exchange rate volatility of Indonesia. These empirical findings imply that the rupiah-dollar exchange rate volatility is more vulnerable to domestic GPRI than global GPR.