Geopolitical risk and bond market dynamics: Assessing the impact of threats and realized events

Adnan Aslam and Mohammad Khaleq Newaz

The Quarterly Review of Economics and Finance, 2025, vol. 103, issue C

Abstract: This study examines the impact of geopolitical risk on global bond markets, with a focus on distinguishing between geopolitical threats and realized geopolitical events. Using daily data, the study applies a multi-method framework comprising the time-varying parameter vector autoregression connectedness framework, wavelet quantile correlation, and cross-quantilogram analysis to investigate dynamic spillovers, asymmetric relationships, and lead-lag dependencies between geopolitical risk categories and bond markets. Our findings show that bond markets exhibit pronounced sensitivity to geopolitical shocks, with threat-based risks exerting a more persistent and widespread impact than realized geopolitical events. Sovereign and corporate bonds emerge as particularly vulnerable, whereas alternative fixed-income instruments such as sukuk and municipal bonds demonstrate greater resilience. Although bonds are often viewed as long-term safe-haven assets, their short-term hedging effectiveness varies considerably across segments and risk types. Notably, sukuk consistently serve as a reliable safe-haven during periods of elevated geopolitical threat. Our results underline the complexity of geopolitical risk effects, illustrating the importance of distinguishing between geopolitical threats and realized geopolitical events for understanding investor behaviour, risk premiums, and asset pricing dynamics. This study contributes to the literature by offering new insights into the resilience of different bond segments to geopolitical shocks and providing valuable implications for portfolio diversification, risk management, and investment strategies during periods of heightened geopolitical uncertainty.

Keywords: Spillovers; Geopolitical risk; Geopolitical threats and acts; Bond markets; Wavelet quantile correlation; Cross quantilogram (search for similar items in EconPapers)
JEL-codes: C22 D81 G12 G15 G18 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:103:y:2025:i:c:s1062976925000730

DOI: 10.1016/j.qref.2025.102032

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