Geopolitical Risk Impacts on Asset Markets: Evidence from Data over a Century
Posted: 23 Aug 2018 Last revised: 30 Apr 2019
Date Written: July 20, 2018
This study investigates the effects of geopolitical risk (GPR) on asset markets in 17 advanced countries from 1899 to 2016 using novel GPR indices. First, compared with housing returns, stock returns are more sensitive to increases in GPR: on average, an increase in GPR significantly decreases annual stock returns by about 0.09%. Further, under materialised geopolitical uncertainty, significant and negative effects disappear. Second, high GPR levels generate high risk premiums. Third, high GPR changes discount rate and negatively affects GDP, especially for private consumption, and private investment. Finally, gold cannot be used to hedge GPR, but a long Swiss franc position can.
Keywords: Geopolitical risk; stock returns; housing returns; safe haven
JEL Classification: D80; G12; G15; H56
Suggested Citation: Suggested Citation