The Relationship Between Geopolitical Risk and Asset Market Co-Movement: Evidence from South Africa

Periods of geopolitical uncertainty have increasingly shaped the performance of global financial markets, yet the extent to which these risks influence the co-movement of asset markets in South Africa remains unclear. Although co-movement has emerged as a crucial factor for investors seeking portfolio diversification, existing studies present mixed findings, with some suggesting that geopolitical risk strengthens financial integration, defined as the extent to which markets move together in response to global shocks, while others find that it weakens these linkages by triggering market segmentation. Against this backdrop, this study examines the impact of geopolitical risk’s influence on the co-movement of South African asset markets, focusing on how shifts in global uncertainty interact with local market dynamics. Using time-series monthly data from December 2004 to January 2025, the study applies a dual-method approach. The multivariate generalised autoregressive conditional heteroskedasticity asymmetric dynamic conditional correlation (MGARCH-ADCC) model is first employed to estimate time-varying correlations across the equity, bond, and property markets. Thereafter, the autoregressive distributed lag (ARDL) model is used to assess both the short- and long-run effects of geopolitical risk on these co-movement patterns. The results indicate that geopolitical risk significantly increases co-movement between South African asset markets in both the short and long run, thereby diminishing the traditional benefits of diversification. These findings reinforce the view that market participants respond collectively to uncertainty rather than fundamentals. Overall, the study contributes to the empirical understanding of market integration under geopolitical stress and highlights the need for investors and policymakers to incorporate geopolitical risk indicators into investment and policy frameworks to strengthen market resilience.