Abstract
This paper examines how geopolitical risk (GPR) is transmitted across global financial markets by analyzing its effects on equities, sovereign bonds, foreign exchange, and commodities. Moving beyond single-regime and single-dimension approaches, the study adopts a two-regime Markov-switching framework to capture the state-dependent pricing of geopolitical shocks under low- and high-volatility market conditions. GPR is modeled along multiple dimensions, incorporating regional and national indicators as well as six major bilateral geopolitical tensions. This multidimensional design allows for a comprehensive assessment of how different sources of geopolitical stress affect asset returns across market regimes.
The empirical framework evaluates whether geopolitical shocks are priced heterogeneously across asset classes, market conditions, and levels of geopolitical aggregation, and whether bilateral tensions convey information beyond aggregate GPR indicators. The results reveal strong regime dependence and pronounced cross-asset heterogeneity, with regional and bilateral GPR emerging as the primary drivers of asset price responses, while national GPR plays a more limited role. The findings highlight marked differences across asset classes, identify assets that exhibit defensive or safe-haven characteristics, and document persistent and lagged effects in commodity markets. Overall, the study demonstrates that GPR is neither priced uniformly nor transmitted symmetrically across markets, emphasizing the importance of regime-aware, asset-specific, and tension-specific approaches to portfolio construction and risk management under geopolitical uncertainty.
Authors
