Final published version, 648 KB, PDF document
Research output: Working paper
Research output: Working paper
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TY - UNPB
T1 - Equity Market Connectedness across Regimes of Geopolitical Risks
T2 - Historical Evidence and Theory
AU - Jalloul, Maya
AU - Miescu, Mirela
PY - 2021/4/1
Y1 - 2021/4/1
N2 - We use a threshold VAR model to capture connectedness of the equity returns of the G7 in a regime-contingent manner as dened by low- and high-geopolitical risks (GPR).We nd that connectedness is statistically stronger when GPR is at its higher rather than lower regime, but more importantly, this observation can be associated with threats of geopolitical adverse events, rather than with their actual realization. To explain our empirical observations we employ a model of international trade in assets and international relative asset prices. We introduce uncertainty in the future dividend payments combined with ambiguity aversion of agents to changes in the expected dividends. This allows us to model a geopolitical threat as a shock that affects the level of ambiguity about future dividends. At the same time, a geopolitical act is defined as a shock to the current period endowment of a given country, with limited effects on asset prices and returns. Our obtained results have important portfolio allocation implications for investors.
AB - We use a threshold VAR model to capture connectedness of the equity returns of the G7 in a regime-contingent manner as dened by low- and high-geopolitical risks (GPR).We nd that connectedness is statistically stronger when GPR is at its higher rather than lower regime, but more importantly, this observation can be associated with threats of geopolitical adverse events, rather than with their actual realization. To explain our empirical observations we employ a model of international trade in assets and international relative asset prices. We introduce uncertainty in the future dividend payments combined with ambiguity aversion of agents to changes in the expected dividends. This allows us to model a geopolitical threat as a shock that affects the level of ambiguity about future dividends. At the same time, a geopolitical act is defined as a shock to the current period endowment of a given country, with limited effects on asset prices and returns. Our obtained results have important portfolio allocation implications for investors.
KW - Geopolitical Risk
KW - Equity Market Connectedness
KW - Threshold VAR
KW - Asset Trade
KW - Multi-Country Macroeconomic Model
M3 - Working paper
T3 - Economics Working Papers Series
BT - Equity Market Connectedness across Regimes of Geopolitical Risks
PB - Lancaster University, Department of Economics
CY - Lancaster
ER -