Geopolitical risks, uncertainty, and stock market performance

This paper analyses the impact of geopolitical risks and economic policy uncertainty on stock returns. It uses an unbalanced panel dataset of monthly observations for 22 countries for the period 1985-2020. It controls for a set of macroeconomic and market structure variables while also taking into consideration the potential effects of the 2007-2009 financial crisis. This paper shows that the impact of geopolitical risks is negative and statistically significant. The economic interpretation of our main results is that a one-unit standard deviation increase in geopolitical risks decreases stock returns by 10.53-42.14% of its sample mean. For comparison, this paper uses alternatively the global economic policy uncertainty index and the economic policy uncertainty country index, and also finds a statistically significant negative relationship although it is weaker in the latter case.