Geopolitical risk exposure and stock returns: Evidence from China

This study explores the effect of geopolitical risk on stock returns in China. We identify a significant premium associated with low geopolitical risk exposure: stocks with lower geopolitical risk exposure outperform the ones with higher geopolitical risk exposure in the ensuing months. Our findings suggest that this premium is not attributable to risk-adjusted factors or recognized common pricing factors. Moreover, the robustness of this premium can be demonstrated by a range of alternative settings. Finally, we provide a potential explanation for the low risk exposure premium: geopolitical risk shocks lead to increased investor attention, making investors more inclined to purchase stocks with low risk exposure to hedge against geopolitical risk.