Geopolitical risk and stock market volatility in emerging markets: A GARCH – MIDAS approach

Afees Salisu, Ahamuefula Ogbonna, Lukman Lasisi and Abeeb Olaniran

The North American Journal of Economics and Finance, 2022, vol. 62, issue C

Abstract: In this study, we examine the connection between geopolitical risk (GPR) and stock market volatility in emerging economies. Our motivation for this study is premised on the need to assess both the predictability and the associated economic gains in relation to the subject in order to offer more useful insights to investors and practitioners. To the best of our knowledge, this is the first study that jointly considers these objectives. Consequently, we employ the GARCH-MIDAS framework which accommodates mixed data frequencies thereby circumventing information loss or any associated bias. We find that emerging stock market volatility responds more positively to geopolitical risks although the act-related GPR index offers better out-of-sample forecasts than the threat-related GPR. We also find that accounting for global economic factors in the predictability analysis is crucial for robust outcomes. Finally, we provide some utility gains of including GPR in the predictive model of stock market volatility while also highlighting some useful implications of our findings for investment and policy decisions.

Keywords: Geopolitical risk; Stock market volatility; Emerging markets; GARCH-MIDAS (search for similar items in EconPapers)
JEL-codes: C53 E44 G15 G17 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:62:y:2022:i:c:s1062940822001024

DOI: 10.1016/j.najef.2022.101755

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