Geopolitical Risk and Stock Returns
Paper analyzes geopolitical risk's impact on stock returns using a novel WSJ-based index and robust econometric methods.
What it examines
The paper constructs a novel Geopolitical Risk Index (GRI) by analyzing Wall Street Journal articles. It extends past work by incorporating trade wars and uses textual analysis with advanced econometrics to examine how geopolitical risk predicts aggregate and cross-sectional stock returns, investigating risk’s role in asset pricing.
What it concludes
The study shows that geopolitical risk is priced and predicts market returns. Findings help investors design better risk management and asset allocation strategies while guiding policymakers. Future research could explore firm-level investment effects, making this research useful for financial planning and informing economic policy decisions.
Evidence objects
Researchers construct a novel Geopolitical Risk Index (GRI) using Wall Street Journal archives from 1984 to 2025, revealing a one-standard-deviation increase nearly doubles annualized excess returns, underscoring surprising market sensitivity.
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The study uncovers that trade war events independently predict stock market returns, expanding research by blending traditional indices with innovative, comprehensive dictionary-based methodologies for a refined measurement of geopolitical uncertainty.
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Employing the IVX method, sophisticated econometric techniques, and long-term data, the research links geopolitical turmoil to elevated risk premiums and abnormal stock returns, despite limitations from a single news source.
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The paper bridges geopolitical risk, including trade wars underexplored so far, to future stock market returns. Its innovative methodology, building a comprehensive Geopolitical Risk Index using textual analysis, challenges risk measures. This fresh perspective and approach make it a compelling, original, and significant contribution to equity and quantitative finance research.
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Raw abstract and provenance
- … Given the distinct importance of trade wars, we also construct a separate Trade War … a crucial role in shaping global equity premiums, particularly over the past 25 years. …
Source row: 988 · abstract type: snippet