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Echoes of instability: how geopolitical risks shape government debt holdings

Author

Listed:
  • António Afonso

    (Universidade de Lisboa)

  • José Alves

    (Universidade de Lisboa)

  • Sofia Monteiro

    (Universidade de Lisboa)

Abstract

Recognizing the profound influence of geopolitical risks and world uncertainty on financial investment behaviour, this study uses a comprehensive approach to assess the impact of rising geopolitical risk on sovereign debt holdings for a panel of 24 OECD economies for the period of Q1 2004 to Q4 2023. To do so, we employ ordinary least squares (OLS) fixed effects and quantile regression techniques within a panel data framework to capture the nuanced effects on both domestic and foreign entities holdings. We find that escalating geopolitical tension decreases government debt holdings among domestic entities, notably domestic Banks, while foreign investors increase their ownership. This phenomenon is more pronounced for high proportion levels of debt in investor’s portfolios. Further, our results allow us to conclude that while domestic economic agents display clearer risk aversion, foreign economic agents have a more risk-taking behaviour in what concerns the financial investment made on government debt.

Suggested Citation

  • António Afonso & José Alves & Sofia Monteiro, 2025. "Echoes of instability: how geopolitical risks shape government debt holdings," Economic Change and Restructuring, Springer, vol. 58(3), pages 1-28, June.
    • Handle: RePEc:kap:ecopln:v:58:y:2025:i:3:d:10.1007_s10644-025-09879-y
    DOI: 10.1007/s10644-025-09879-y
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    More about this item

    Keywords

    Sovereign debt; Geopolitical risk; World uncertainty; OLS; Quantile regression;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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