Volatility connectedness between geopolitical risk and financial markets: Insights from pandemic and military crisis periods

Abstract

Geopolitical risk notably affects cross-market linkages and risk spillovers. However, the void remains in the extant literature, providing little empirical evidence on the risk spillover influences of geopolitical crises on different segments of financial markets. Employing a time-varying VAR framework to model a risk spillover network, this paper examines the risk spillover across geopolitical risk, stocks, bonds, forex, gold, and energy markets from crisis and long-term perspectives. Results show that the bond market plays a significant role in the spillover network. Results also identify more risk spillover during military conflicts than during the COVID-19 pandemic. Geopolitical risk intensifies under geopolitical threats and conflicts, amplifying cross-market spillovers, with geopolitical risk acting as a risk transmitter. Gold is a risk receiver in both the long-term and crisis periods, with risk spillovers from geopolitical risk to market segments being asymmetric. These findings have significant implications for policymakers and market participants.