Teflon Capitalism: Geopolitical Risk and Investment Funds

Daniel Marcel te Kaat, Jiancong Liu and Alexander Raabe

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Why do stock markets appear resilient to geopolitical risk? Using firm-level measures of geopolitical risk exposure and data on investment funds' holdings, we show how funds help swiftly restore valuations compressed during bouts of heightened geopolitical risk. More intense geopolitical shocks strengthen this stabilizing role. Declines in valuations of exposed but otherwise sound firms raise expected returns, attracting funds to acquire these assets at depressed prices, consistent with a search for yield mechanism. This behavior is more pronounced among funds with greater risk-taking capacity and weaker past performance. Funds' tilt toward exposed stocks increases portfolio concentration, partly offset by higher cash buffers. In contrast, ultimate investors withdraw from exposed funds. The results are not driven by any particular industry - including defense or dual-use production - and are robust to a rich set of controls, fixed effects, and placebo tests.

Keywords: geopolitical risk; investment funds; portfolio reallocations; stock markets (search for similar items in EconPapers)
JEL-codes: F3 F5 G1 G3 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2026-10
New Economics Papers: this item is included in nep-ifn
References: Add references at CitEc
Citations:

Downloads: (external link)
https://openresearch-repository.anu.edu.au/server/ ... bf9add574ed3/content (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2026-88

Access Statistics for this paper

More papers in CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University Contact information at EDIRC.
Bibliographic data for series maintained by Cama Admin ().