Recent events seem to be fraught with geopolitical tensions, possibly as political events are now easier to follow due to smartphones providing instantaneous news updates.

These events can have serious repercussions for global markets, economic stability and regional security – causing currency fluctuations, trade disputes, supply chain interruptions and supply chain closures.

What is a Geopolitical Event?

Geopolitical events refers to any event which disrupts international relationships among two or more nations – from military conflicts to economic sanctions.

Geopolitical events resulting from conflict, natural disasters or other sources often bring instability to financial markets and have significant ramifications on investments – stock market volatility, currency market fluctuations and commodity price movements can be caused as a result.

Geopolitical tensions between the United States and North Korea often result in unilateral and multilateral economic sanctions against North Korea, which can create supply-chain disruptions with far-reaching repercussions for supply chains worldwide – potentially increasing oil prices which in turn has an immediate effect on economies around the globe and financial markets. Geopolitical events also play a part in shaping economies through trade agreements or diplomatic negotiations – so investors need to understand their effect on investments.

What is the Impact of a Geopolitical Event on Financial Markets?

Geopolitical events refer to any significant occurrence or development in international politics that could impact financial markets, from elections to war. They can have various impacts such as altered government policies affecting investments opportunities or business operations as well as creating uncertainty and volatility within markets that could ultimately compromise investor trust and global financial stability.

Political events may take place either domestically, within one nation, or internationally, impacting multiple nations. Some examples of political events are elections, wars and political instability – each event can either have immediate ramifications for investors and markets or play out over an extended period.

Recent events have demonstrated the significance of assessing and monitoring geopolitical risks, especially for markets heavily reliant on foreign capital such as emerging markets. Geopolitical tensions may cause financial markets to fluctuate wildly while decreasing risk diversification potential by restricting investors’ willingness to invest across countries.

How Can We Measure the Impact of a Geopolitical Event on Financial Markets?

Geopolitical events have the power to have significant effects on financial markets, making predictions difficult. Therefore, it is wise to remain aware of major risks on the horizon and learn about their potential impact.

An American-Chinese trade war can create uncertainty and volatility across global stock markets, straining global supply chains, economic growth, and investment decisions.

Geopolitical events can be measured on stocks by looking at spikes in a geopolitical risk index developed by Dario Caldara and Matteo Iacoviello through automated searches for keywords in newspapers. Our results have demonstrated that spikes are associated with moderate decreases in shares.

Geopolitical events’ impact on share returns increases when the index is higher, suggesting investors are more wary about risk. Time and distance also have an effect, for example news stories reporting military threats from North Korea can cause more stocks to decline than when there is talk of dialogue or economic cooperation with that country.

How Can We Predict the Impact of a Geopolitical Event on Financial Markets?

Geopolitical events can have immediate impacts on financial markets. Investors become reluctant to take risks amid uncertainty, potentially withdrawing from the market altogether and prompting further negative responses within it.

Geopolitical tensions may result in various economic effects, including shifts in foreign investment flows, trade disputes, sanctions and currency volatility that amplify currency volatility and have an impact on commodity prices.

Historical spikes of the Geopolitical Risk Index and their subsequent performance of US sharemarkets allow us to see how shares react to geopolitics. As seen below, while initially respond negatively to initial movements in GRI, sharemarkets eventually recover rapidly.

Longer term, increased global political polarization may increase financial stability risks. Geopolitical tensions may lead to governments restricting cross-border credit, investment and capital flows which in turn could negatively impact overall economic growth, business conditions and liquidity levels.