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Geopolitical risks and exchange rates

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  • Yilmazkuday, Hakan

Abstract

This paper investigates the effects of geopolitical risks on exchange rates of 35 countries. The investigation is based on a structural vector autoregression model, where developments in oil prices, economic activity, inflation and policy rates are controlled for. The empirical results suggest that shocks to geopolitical risks result in currency depreciations only in China, Israel, the Philippines and the United States, whereas they result in currency appreciations mostly in South Africa, Brazil, Australia, and Iceland, among others, after one year. When the heterogeneity across countries is further investigated, it is shown that currencies of countries that are involved more in global value chains depreciate more following shocks to geopolitical risks, especially in the short run. Robustness checks indicate that the latter result is mostly driven by geopolitical acts. Important policy suggestions follow for countries that are integrated into global value chains.

Suggested Citation

  • Yilmazkuday, Hakan, 2025. "Geopolitical risks and exchange rates," Finance Research Letters, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:finlet:v:74:y:2025:i:c:s1544612325000340
    DOI: 10.1016/j.frl.2025.106769
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    References listed on IDEAS

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    3. Vu Minh Ngo & Huan Huu Nguyen & Phuc Nguyen, 2025. "Geopolitical risks, monetary trilemma, and global stagflation," International Economics and Economic Policy, Springer, vol. 22(3), pages 1-23, July.
    4. Puławska, Karolina & Sikora, Artur & Snarska, Małgorzata & Strzelczyk, Wojciech, 2026. "Macro risks and their impact on insurer stock prices: Analyzing climate, geopolitical, and cybersecurity risks," Research in International Business and Finance, Elsevier, vol. 81(C).
    5. Gabbiadini, Mirko & Meoli, Michele & Vismara, Silvio, 2025. "Geopolitical risk and systemic risk in the European banking system," Finance Research Letters, Elsevier, vol. 86(PF).
    6. Emna Trabelsi, 2025. "Monetary Policy Transmission Under Global Versus Local Geopolitical Risk: Exploring Time-Varying Granger Causality, Frequency Domain, and Nonlinear Territory in Tunisia," Economies, MDPI, vol. 13(7), pages 1-68, June.
    7. Xiong, Ding & Sun, Yao, 2025. "The rising cost of turmoil: geopolitical crises and supply chain risk," Economics Letters, Elsevier, vol. 255(C).
    8. Shahzad, Syed Jawad Hussain & Hoang, Thi Hong Van & Caporin, Massimiliano & Naifar, Nader, 2026. "Volatility spillovers in forex markets and the role of quantitative easing," The North American Journal of Economics and Finance, Elsevier, vol. 81(C).
    9. Shao, Yanmin & Li, Junlong, 2025. "When renewable energy technology products exports meet geopolitical risks: Can environmental policies sweeten the bitter pill of the trade?," Energy Economics, Elsevier, vol. 145(C).
    10. Zhou, Zhiping & Wang, Kai, 2025. "War discourse predicts stock market volatility: A century of evidence," Finance Research Letters, Elsevier, vol. 82(C).
    11. Mitra, Gaurav & Gupta, Vandana & Gupta, Gaurav, 2025. "Global uncertainties and performance of Indian firms: A comparative study of geopolitical risk and economic policy uncertainty," Finance Research Letters, Elsevier, vol. 86(PA).
    12. Yazdan Babazadeh Maghsoodlo & Amin Safaeesirat, 2025. "Currents Beneath Stability: A Stochastic Framework for Exchange Rate Instability Using Kramers Moyal Expansion," Papers 2507.01989, arXiv.org.

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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