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Geopolitical risk, financial innovation, and capital flow in emerging market economies

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  • Hu, Ying
  • Li, Yiyu

Abstract

This study examines the relationship between geopolitical risk (GR), financial innovation, and capital flow in emerging market economies. Using country-level panel data from 2001 to 2023, the results show that GR exerts a significant negative effect on capital flows. Financial innovation operates as a mediating mechanism in this relationship, while government corruption and the quality of legislative institutions serve as important moderating factors. The analysis further reveals substantial heterogeneity in the impact of GR on capital flows across countries with different levels of economic development and loan availability. Overall, the findings clarify how emerging market economies can better sustain capital flows under heightened GR and underscore the critical roles of financial innovation, governance quality, and legislative institutions in mitigating these pressures. This study aims to investigate the mechanisms through which GR influences capital flows, with a focus on the mediating role of financial innovation and the moderating effects of institutional factors.

Suggested Citation

  • Hu, Ying & Li, Yiyu, 2026. "Geopolitical risk, financial innovation, and capital flow in emerging market economies," Finance Research Letters, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:finlet:v:97:y:2026:i:c:s1544612326003557
    DOI: 10.1016/j.frl.2026.109825
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