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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Equity Market Connectedness across Regimes of Geopolitical Risks
T2 - Historical Evidence and Theory
AU - Miescu, Mirela
AU - Jalloul, Maya
PY - 2023/10/31
Y1 - 2023/10/31
N2 - We use a threshold VAR model to capture the connectedness of the equity returns of the G7 in a regime-contingent manner as defined by low- and high-geopolitical risks (GPR). We find that connectedness is statistically stronger when GPR is at its higher rather than lower regime, but more importantly, this observation can be associated with the threat of adverse geopolitical 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 future dividend payments combined with agents' ambiguity aversion 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 the connectedness of the equity returns of the G7 in a regime-contingent manner as defined by low- and high-geopolitical risks (GPR). We find that connectedness is statistically stronger when GPR is at its higher rather than lower regime, but more importantly, this observation can be associated with the threat of adverse geopolitical 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 future dividend payments combined with agents' ambiguity aversion 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
U2 - 10.1016/j.jimonfin.2023.102910
DO - 10.1016/j.jimonfin.2023.102910
M3 - Journal article
VL - 137
JO - Journal of International Money and Finance
JF - Journal of International Money and Finance
SN - 0261-5606
M1 - 102910
ER -