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Geopolitical Risk, Capital Flow Volatility, and Asset Market Spillovers

Author

Listed:
  • John Beirne

    (Asian Development Bank)

  • Nuobu Renzhi

    (Capital University of Economics and Business in Beijing)

Abstract

This paper examines the effects of country-specific geopolitical risk on capital flow volatility and asset markets across 29 emerging and advanced economies over the period 2000–2023. Using panel regressions and a panel structural vector autoregression framework, the results show that geopolitical risk raises bond yields and leads to exchange rate depreciation, with stronger and more persistent effects in emerging economies. Asset markets for advanced economies are affected mainly through lower equity prices. The impact on capital flow volatility is slightly higher on average for advanced economies but remains more persistent for emerging economies. Greater financial development, higher central bank independence, and lower public debt mitigate the adverse effects of geopolitical risk on both capital flows and asset markets. These findings highlight the importance of strong macroeconomic fundamentals and institutional frameworks in building resilience against geopolitical shocks.

Suggested Citation

  • John Beirne & Nuobu Renzhi, 2025. "Geopolitical Risk, Capital Flow Volatility, and Asset Market Spillovers," ADB Economics Working Paper Series 820, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:021786
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    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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