China's geopolitical risk and international financial markets: evidence from Canada

Given the high level of economic and financial globalization, geopolitical tensions can disrupt international trade and negatively influence financial markets. China, a global economic power, has been at the center stage of recent geopolitical tensions with widespread economic implications. We empirically investigate the effect of China's geopolitical risk on Canada's equity markets. The results show a persistent impact on market returns and volatility, most prominently on the resources and energy sectors. Even though China plays a smaller role than the US as a trading partner, China's geopolitical risk significantly affects the Canadian stock market and its component sectors. Our results, therefore, support the need for a constructive approach toward alleviating global geopolitical tensions and for the development of geopolitical risk hedging strategies such as insurance and investment in commodities at the country and investor levels.