Newly-constructed Chinese geopolitical risk index and trade stock returns

This study constructs a Chinese Geopolitical Risk (CGPR) Index by applying a text-based approach and examines its predictive power for the excess returns of the Chinese trade stock index. Our analysis shows that the CGPR index is beneficial compared with other indicators (e.g., the geopolitical risk indices proposed by Caldara and Iacoviello, 2022) from both statistical and economic perspectives. The CGPR index strongly and negatively predicts excess returns on Chinese trade stocks, especially for state-owned firms. Following significant events such as the COVID-19 pandemic and Sino-US trade disputes, the results show that the CGPR index's predictive power has increased. Additional evidence shows that the CGPR index negatively forecasts cross-sectional trade stock returns, especially for companies regarded as conservative, straightforward to value, and with lower arbitrage costs.