Impact of Geopolitical Risks on Equity Returns

NEW WORKING PAPER: This study analyzes the effects of local and global geopolitical risks (GPR) on real equity returns. Using a panel and country-specific local projections (LP) model, we analyze the impact of local and global GPR shocks, where the latter is further decomposed into aggregate risks, threats, and acts. Our findings reveal that both local and global GPR shocks negatively impact real equity returns at the onset, with global shocks generally exerting a stronger influence. While threats tend to have a more pronounced negative effect compared to acts, we observe heterogeneous responses on financial markets to different types of geopolitical risks, we find that acts have greater potency in economies exposed to higher levels of local GPR due to recurring conflicts and geopolitical tensions.

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