Does geopolitical distress tip the European financial stock markets into a great uncertainty regime?

David Neto

Research in Economics, 2025, vol. 79, issue 3

Abstract: This paper aims to explore the role of geopolitical risk on the probability of falling into a high regime of financial uncertainty in Europe. To this end, a Markov-switching model with time-varying transition probabilities (TVP) is estimated for the EURO STOXX 50 volatility index, which serves as a proxy for financial uncertainty in European stock markets. Unlike the commonly used fixed transition probability models, the TVP specification allows the transition probabilities between states to depend on explanatory variables, which in this context are geopolitical risk factors. The results highlight a moderate and asymmetric effect of geopolitical risk on financial uncertainty. Specifically, while geopolitical risk appears to trigger surges in uncertainty, it does not seem to contribute to their reduction.

Keywords: Geopolitical risk; Financial uncertainty; European stock market; Time-varying transition probability model; Markov-switching process; Inferred probability; Stochastic volatility model (search for similar items in EconPapers)
JEL-codes: C22 G15 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:79:y:2025:i:3:s1090944325000298

DOI: 10.1016/j.rie.2025.101052

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