The role of geopolitical risk on the ESG stock market: evidence from functional data analysis

An explainable ensemble decision support framework was developed for forecasting ESG stock market prices from the perspective of geopolitical risk. Considering the limitation of single-dimensional geopolitical risk measurement, this paper characterizes geopolitical risk from eight aspects, and systematically study their heterogeneity. The results show that the prediction performance of ESG stock market volatility is worse than that of the return due to geopolitical risk. In detail, the empirical results show that the geopolitical risk has a larger predictive power for the return of SPLAELUT, while the volatility of SPEELMUT. The most prominent and largest predictive contribution is the terror acts (the military buildups) on the ESG stock return (volatility). Additionally, the feature contribution of geopolitical risk on ESG stock market price prediction changes dynamically with different periods, and their morphological characteristics have typical category patterns, which could be clustered into two patterns. Whether return or volatility prediction, the role of geopolitical risk on ESG stock market is similar among SPAPDLUT, SPAPELUT, and SPEELMUT markets. This paper expands the research perspective of ESG stock market similarity and geopolitical risk factor analysis, providing empirical support for the formulation of management strategies for financial regulators and portfolio allocation in securities markets.