Geopolitical risks and financial stress in emerging economies

Tam NguyenHuu (nguyen@leuphana.de) and Deniz Karaman Örsal
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Tam NguyenHuu: Leuphana Universitat Luneburg

No 2022.09, Working Papers from International Network for Economic Research - INFER

Abstract: We investigate the impacts of geopolitical risks (GPRs) on financial stress (FS) in major emerging economies between 1985 and 2019. Applying a recently developed panel quantile estimation method, we show that GPRs pose serious risks to the stability of the financial condition in emerging economies. Namely, when FS is already equal to or above average, GPRs intensify this instability to a remarkable degree. In contrast, GPRs do not ignite the stress when the financial situation is benign. In emerging economies, foreign exchange markets, and to a lesser extent, the banking industry, and the debt market suffer more severe consequences of geopolitical tensions than the stock market. In contrast, advanced economies, represented by the Group of Seven (G7) economies, have witnessed detrimental consequences of GPRs on their stock markets but negligible effects on other parts of their financial systems.

Keywords: geopolitical risks; financial stress; emerging economies; stock market; banking sector; foreign exchange market; debt market (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
Pages: 40 pages
Date: 2022
New Economics Papers: this item is included in nep-ban and nep-fdg
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