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Does geopolitical distress tip the European financial stock markets into a great uncertainty regime?

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  • Neto, David

Abstract

This paper aims to explore the role of geopolitical risk on the probability of falling into a high regime of financial uncertainty in Europe. To this end, a Markov-switching model with time-varying transition probabilities (TVP) is estimated for the EURO STOXX 50 volatility index, which serves as a proxy for financial uncertainty in European stock markets. Unlike the commonly used fixed transition probability models, the TVP specification allows the transition probabilities between states to depend on explanatory variables, which in this context are geopolitical risk factors. The results highlight a moderate and asymmetric effect of geopolitical risk on financial uncertainty. Specifically, while geopolitical risk appears to trigger surges in uncertainty, it does not seem to contribute to their reduction.

Suggested Citation

  • Neto, David, 2025. "Does geopolitical distress tip the European financial stock markets into a great uncertainty regime?," Research in Economics, Elsevier, vol. 79(3).
    • Handle: RePEc:eee:reecon:v:79:y:2025:i:3:s1090944325000298
    DOI: 10.1016/j.rie.2025.101052
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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