Geopolitical Risks and Equity Returns: Does Size Matter?

In recent years, geopolitical risks and uncertainties have increasingly disrupted financial markets by introducing vulnerabilities that affect equity investment decisions, with firm size playing a critical role in determining resilience to such shocks. This study investigates the size-specific effects of GPR on equity returns across different market conditions. To achieve the objectives of this study, size-based JSE indices are employed as proxies for firms of varying capitalisations, in conjunction with the global and country-specific GPR indices developed by Caldara and Iacoviello (2022), covering the period from 1 May 2015 to 30 April 2025. A Markov Regime-Switching model is used to distinguish between bull and bear market regimes. The analysis yields three key findings: (I) the effects of domestic and global GPR are not uniform, (II) equity return sensitivity to GPR shocks is regime-dependent, and (III) the impact of GPR varies across firm sizes. These findings underscore the importance of a multidimensional approach to risk management, whereby investors and policymakers should consider both firm size and prevailing market regimes when assessing exposure to geopolitical risk.