Geopolitical risk and stock market volatility: The case of US weapon and non-weapon firms

This paper examines how the evolution of geopolitical risk (GPR) influences the market dynamics of weapon (WPs) and non-weapon producers (NWPs) in the United States over the period January 2014–March 2025. Adopting a Wavelet Coherence framework, we analyze the market response of a representative sample of WP and NWP to the GRP index fluctuations, as well as to its components, GPR-Acts and GPR-Threats. The empirical analyses show that WPs’ volatility is predominantly driven by GPR-Acts, while they tend to lead market co-movements when shocks stem from threats alone. When geopolitical tensions escalate from threats into acts, on the other hand, the co-movement becomes non-directional, revealing a complex and asymmetric market behavior. Furthermore, NWPs display heterogeneous responses: sectors such as consumer discretionary and healthcare amplify exposure to GPR, whereas energy and utilities provide partial hedging. Industrials display lagged but similar reactions to WPs, while the information technology sector shows even stronger co-movement with GPR than defense firms. These findings provide novel insights into the complex propagation mechanism of geopolitical shocks across industries, contribute to the literature on controversial assets and market resilience under geopolitical uncertainty, and offer insights for investors, regulators, and policymakers.