Disaggregated geopolitical risks and global stock returns

Abstract

We introduce a novel framework to measure how geopolitical risk exposure (GRE) affects stock returns. Using data from 40 countries over 1995-2022, we construct three factors: geopolitical risk factor (GPRF), geopolitical act factor (GPAF), and geopolitical threat factor (GPTF). This study documents four main findings. First, geopolitical threats (GPTs) have markedly stronger GRE than geopolitical acts (GPAs), with 58% of countries showing significant GPTF results vs. 35% for GPAF. Second, predictability is strongest at shorter horizons, with 68% of countries demonstrating significant one-month predictability for GPTF effects. Third, these effects persist even after accounting for established market risk factors, with 33% of countries maintaining significant GPTF relationships. Fourth, our factors provide economically meaningful out-of-sample forecasting ability, yielding positive R2 values in 60% of countries and utility gains for mean-variance investors. The findings offer a practical framework for integrating GRE assessments into decisions.