When bad news is good news: Geopolitical risk and the cross-section of emerging market stock returns

Adam Zaremba (), Nusret Cakici, Ender Demir and Huaigang Long

Journal of Financial Stability, 2022, vol. 58, issue C

Abstract: Using a news-based gauge of geopolitical risk, we study its role in asset pricing in global emerging markets. We find that changes in risk positively predict future stock returns. The countries with the highest increase in geopolitical uncertainty outperform their counterparts with the lowest change by up to 1% per month. The anomaly is not explained by other established asset pricing effects and remains robust to many considerations. We link the observed phenomenon with investor overreaction to geopolitical news driven by the availability bias.

Keywords: Geopolitical Risk Index; The cross-section of stock returns; Emerging markets; Equity anomalies; Asset pricing; Return predictability; Overreaction; Availability heuristic; Salience (search for similar items in EconPapers)
JEL-codes: D81 D83 G12 G14 G15 G41 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1572308921001236
Full text for ScienceDirect subscribers only

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:eee:finsta:v:58:y:2022:i:c:s1572308921001236

DOI: 10.1016/j.jfs.2021.100964

Access Statistics for this article

Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

More articles in Journal of Financial Stability from Elsevier
Bibliographic data for series maintained by Catherine Liu ().