When Bad News is Good News: Geopolitical Risk and the Cross-Section of Emerging Market Stock Returns

50 Pages Posted: 17 Dec 2020 Last revised: 20 Dec 2020

See all articles by Adam Zaremba

Adam Zaremba

Montpellier Business School; Department of Investment and Capital Markets, Institute of Finance, Poznan University of Economics and Business

Nusret Cakici

Fordham University

Ender Demir

Istanbul Medeniyet University

Date Written: November 4, 2020

Abstract

Using a news-based gauge of geopolitical risk, we study its role for asset pricing in global emerging markets. We find that changes in risk positively predict future stock returns. The countries with the highest increase in geopolitical uncertainty outperform their counterparts with the lowest change by up to 1% per month. The anomaly is not explained by other established asset pricing effects and remains robust to many considerations. We link the observed phenomenon with investor overreaction to geopolitical news driven by the availability bias.

Keywords: Geopolitical Risk Index, the Cross-Section of Stock Returns, Emerging Markets, Equity Anomalies, Asset Pricing, Return Predictability, Overreaction, Availability Heuristic, Salience

JEL Classification: D81, D83, G12, G14, G15, G41

Suggested Citation

Zaremba, Adam and Cakici, Nusret and Demir, Ender, When Bad News is Good News: Geopolitical Risk and the Cross-Section of Emerging Market Stock Returns (November 4, 2020). Available at SSRN: https://ssrn.com/abstract=3728341 or http://dx.doi.org/10.2139/ssrn.3728341

Adam Zaremba (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000
France

Department of Investment and Capital Markets, Institute of Finance, Poznan University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

HOME PAGE: http://adamzaremba.pl

Nusret Cakici

Fordham University ( email )

Fordham University
Graduate School of Business
New York, NY 10023
United States
2126366776 (Phone)

Ender Demir

Istanbul Medeniyet University ( email )

D-100 Karayolu
Merdivenkoy Mevkii No:6/1 Goztepe/Kadıkoy
Istanbul
Turkey

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