Geopolitical risk exposure and stock returns: Evidence from China

Yaojie Zhang, Yuxuan Zhang, Xinrui Ren and Meichen Jin

Finance Research Letters, 2024, vol. 64, issue C

Abstract: This study explores the effect of geopolitical risk on stock returns in China. We identify a significant premium associated with low geopolitical risk exposure: stocks with lower geopolitical risk exposure outperform the ones with higher geopolitical risk exposure in the ensuing months. Our findings suggest that this premium is not attributable to risk-adjusted factors or recognized common pricing factors. Moreover, the robustness of this premium can be demonstrated by a range of alternative settings. Finally, we provide a potential explanation for the low risk exposure premium: geopolitical risk shocks lead to increased investor attention, making investors more inclined to purchase stocks with low risk exposure to hedge against geopolitical risk.

Keywords: Geopolitical risk; Cross-section of stock returns; Return predictability; Chinese stock market (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:64:y:2024:i:c:s1544612324005099

DOI: 10.1016/j.frl.2024.105479

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