Stocks, Currencies, and Geopolitical Shocks: Evidence from Advanced and Emerging Markets

Georgios Bampinas (), Ioannis Karfakis (), Theodore Panagiotidis and Georgios Papapanagiotou ()
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Georgios Bampinas: Department of Economics, University of Macedonia
Ioannis Karfakis: Hertfordshire Business School, University of Hertfordshire
Georgios Papapanagiotou: Department of Economics, University of Macedonia

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: This study investigates how geopolitical risk shapes the relationship between stock and currency markets. We address the limited evidence on their joint dynamics under uncertainty. While prior literature shows that geopolitical risk affects individual financial markets, less is known about its role in the stock currency interdependence across different economies. Using local Gaussian partial correlations and bootstrap inference for advanced and emerging economies, we analyze nonlinear and asymmetric dependence patterns. Our results show that in advanced economies, stock returns and currency changes are negatively linked, consistent with portfolio balance and flow-oriented theories, whereas emerging markets display positive dependence, reflecting capital flow and risk-based channels. Lead–lag effects reveal that exchange rates dominate in emerging markets, while advanced markets exhibit bidirectional interactions. Under elevated geopolitical risk, dependence strengthens and tail risks become more synchronized, particularly in emerging markets. These findings advance our understanding of cross market transmission and inform policies on financial stability during geopolitical crises.

Keywords: Stock market; Currency market; Geopolitical risk; Bootstrap analysis Local Gaussian partial correlation (search for similar items in EconPapers)
JEL-codes: C11 E44 G1 Q02 Q43 Q47 (search for similar items in EconPapers)
Date: 2025-08, Revised 2025-08
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