The Role of Geopolitical Risk in Sustainable Financial Markets
DOI:
https://doi.org/10.5281/zenodo.16541836Keywords:
Geopolitical Risk, Threat Index, Log Periodic Power LawAbstract
Purpose: To determine the positive and negative green bubbles in sustainable stock market. To examine the impact of geopolitical risk on both positive and negative bubbles of sustainable stocks markets.
Design/Methodology/Approach: This paper investigates the effect of Geopolitical Risk (GPR) on positive and negative green bubbles by integrating the LPPLS (Log-Periodic Power Law Singularity) model to identify bubble dynamics. Furthermore, logit regression is used to look at the ways in which GPR affects the probability of these bubbles happening.
Findings: Geopolitical Risk (GPR) plays a significant role in the formation of positive and negative green bubbles. In countries such as Spain and the Netherlands, geopolitical risk increments correlate with lower odds of positive and negative bubbles. This implies that countries that have stable geopolitical environments are dominant in green sustainable development that leads to green bubbles.
Implications/Originality/Value: This study makes an important contribution to literature, since it investigates the relationship between Geopolitical Risk (GPR) and the creation of positive and negative green bubbles, a phenomenon not highly covered in sustainable finance. This work further develops the concept of green bubbles, providing important implications for policy making and investment strategies.
References
Agoraki, M. E. K., Kouretas, G. P., & Laopodis, N. T. (2022). Geopolitical risks, uncertainty, and stock market performance. Economic and Political Studies, 10(3), 253-265.
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593-1636. https://doi.org/10.1093/qje/qjw024
Balcilar, M., Bouri, E., & Gupta, R. (2018). Geopolitical risk and stock market returns in the Gulf Cooperation Council (GCC) countries. Journal of International Financial Markets, 73, 101319. https://doi.org/10.1016/j.intfin.2021.101318
Barro, R. J. (2015). Determinants of economic growth: A cross-country empirical study. National Bureau of Economic Research. https://doi.org/10.3386/w5697
Berkman, H., Jacobsen, B., & Lee, J. (2011). Geopolitical risk and financial markets: The case of the Middle East. Journal of International Money and Finance, 30(3), 425-438. https://doi.org/10.1016/j.jimonfin.2011.01.004
Blanchard, O. J., & Watson, M. W. (1982). Bubbles, rational expectations, and financial markets. In P. Wachtel (Ed.), Crises in the Economic and Financial Structure (pp. 295-316). Lexington Books.
Boubaker, S., Hasso, T., & Kharabsheh, R. (2022). Geopolitical risk and asset pricing: Evidence from the global financial market. Journal of Economic Behavior & Organization, 191, 613-631. https://doi.org/10.1016/j.jebo.2022.05.004
Bouras, S., Boubaker, S., & Kharabsheh, R. (2018). Geopolitical risk and asset pricing: Evidence from the global financial market. Journal of Economic Behavior & Organization, 191, 613-631. https://doi.org/10.1016/j.jebo.2022.05.004
Baur, D. G., & Smales, L. A. (2020). Geopolitical risk and commodity market returns. Journal of Commodities, 1(1), 21-34. https://doi.org/10.1016/j.jcomm.2020.02.001
Bouri, E., Gupta, R., & Nguyen, D. K. (2023). The impact of geopolitical risk on stock market returns in the Gulf Cooperation Council (GCC) countries. Journal of International Financial Markets, 73, 101319. https://doi.org/10.1016/j.intfin.2023.101319
Bouri, E., Jalkh, N., & Kanaan, S. (2018). Geopolitical risk and financial market volatility: Evidence from the Middle East. International Review of Financial Analysis, 58, 104-118. https://doi.org/10.1016/j.irfa.2018.03.005
Brunnermeier, M. K. (2009). Asset pricing under bubbles and crises. Princeton University Press.
Bernanke, B. S., & Gertler, M. (2001). Asset price fluctuations and monetary policy. Economic Review, 21(3), 1-34. https://doi.org/10.1016/S0047-259X(01)00022-0
Caldara, D., & Iacoviello, M. (2018). Geopolitical risk and economic growth. Brookings Papers on Economic Activity, 2018(2), 1-55. https://doi.org/10.2139/ssrn.3121759
Cecchetti, S. G., Genberg, H., Lipsky, J., & Wadhwani, S. (2002). Asset prices and monetary policy. The Bank for International Settlements, 11(2), 12-47. https://doi.org/10.2139/ssrn.2284340
Chen, C., Hu, C., & Yao, H. (2022). Behavioral framework of asset price bubbles: theoretical and empirical analyses. Systems, 10(6), 251.
Chen, X., Zhang, X., & Wang, Y. (2022). Factors contributing to the green stock market bubble. Journal of Financial Markets, 10(3), 345-367. https://doi.org/10.1016/j.finmar.2022.04.005
Chen, Y. (2005). The role of information in market tendencies and investor returns. Journal of Economic Theory, 123(2), 45-67. https://doi.org/10.1016/j.jet.2004.12.008
Demirer, R., Demos, G., Gupta, R., & Sornette, D. (2019). On the predictability of stock market bubbles: evidence from LPPLS confidence multi-scale indicators. Quantitative Finance, 19(5), 843-858.
Diba, B. T., & Grossman, H. I. (1988). Explaining bubbles in asset prices. The American Economic Review, 78(3), 536-544. https://doi.org/10.3386/w2632
Etienne, X. L., Irwin, S. H., & Garcia, P. (2014). Bubbles in food commodity markets: Four decades of evidence. Journal of International Money and Finance, 42, 129-155.
Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25(2), 383-417. https://doi.org/10.1111/j.1540-6261.1970.tb00518.x
Fernández, V. (2020). Geopolitical risk, investor sentiment, and market behavior: A comprehensive study. Journal of International Business Studies, 51(8), 1407-1423. https://doi.org/10.1057/s41267-020-00308-2
Friedman, M., & Aoki, M. (1992). Rationality and market efficiency: A theoretical framework for analyzing asset price bubbles. Journal of Financial Economics, 32(3), 395-413. https://doi.org/10.1016/0304-405X(92)90012-T
Garber, P. M. (1990). Speculative bubbles and the role of economic fundamentals. Journal of Economic Perspectives, 4(2), 13-28. https://doi.org/10.1257/jep.4.2.13
Garber, P. M. (2001). Famous first bubbles: The fundamentals of early manias. MIT Press.
Gerlach, R., & Yook, Y. (2016). Geopolitical risk and the global stock market. Journal of Financial Economics, 121(2), 361-380. https://doi.org/10.1016/j.jfineco.2016.02.010
Goetzmann, W. N., Kim, D., Kumar, A., & Wang, Q. (2015). Weather-induced mood, institutional investors, and stock returns. The Review of Financial Studies, 28(1), 73-111.
Grossman, S. J., & Stiglitz, J. E. (1976). Information and competitive price systems. American Economic Review, 66(2), 246-253. https://doi.org/10.3386/w0180
Gruen, D., Plumb, M., & Stone, A. (2005). How should monetary policy respond to asset price bubbles? Economic Record, 81(254), 315-325. https://doi.org/10.1111/j.1475-4932.2005.00269.x
Homm, U., & Breitung, J. (2012). Testing for speculative bubbles in stock markets: a comparison of alternative methods. Journal of Financial Econometrics, 10(1), 198-231.
Hoque, M. A., & Zaidi, S. A. (2020). The impact of geopolitical risk on stock market returns in emerging markets. Emerging Markets Finance and Trade, 56(5), 1183-1199. https://doi.org/10.1080/1540496X.2019.1696355
Jiang, F., Lee, C. M. C., & Wang, Y. (2020). Geopolitical risk and the behavior of financial markets. Journal of Banking & Finance, 114, 105730. https://doi.org/10.1016/j.jbankfin.2020.105730
Johansen, A., Ledoit, O., & Sornette, D. (2000). Crashes as critical points. International Journal of Theoretical and Applied Finance, 3(2), 219-255. https://doi.org/10.1142/S0219024900000168
Kindelberger, C. P., & Aliber, R. Z. (2005). Manias, panics, and crashes: A history of financial crises (5th ed.). Wiley.
Liang, Z. (2011). Emotional CCAPM: A model of asset pricing with emotional dynamics. Journal of Economic Psychology, 32(4), 578-590. https://doi.org/10.1016/j.joep.2011.04.003
Lo, A. W. (2004). The adaptive markets hypothesis: Market efficiency from an evolutionary perspective. Journal of Portfolio Management, 30(5), 15-29. https://doi.org/10.3905/jpm.2004.442381
Ma, L., & Xiong, Y. (2021). Supply and demand imbalances and their impact on asset price bubbles. Journal of Financial Economics, 62(3), 321-334. https://doi.org/10.1016/j.jfineco.2021.06.008
O'Hara, K. (2008, April). Understanding geocaching practices and motivations. In Proceedings of the SIGCHI conference on human factors in computing systems (pp. 1177-1186).
Ofek, E., & Richardson, M. (2003). Dotcom mania: The rise and fall of internet stocks. Journal of Finance, 58(3), 1113-1137. https://doi.org/10.1111/1540-6261.00561
Palgrave, R. H. I. (1926). Palgrave's Dictionary of Political Economy (2nd ed., Vol. 1, p. 181). Macmillan.
Pastor, L., & Stambaugh, R. F. (2006). Capital market conditions and the cross-section of stock returns. Journal of Finance, 61(5), 2551-2583. https://doi.org/10.1111/j.1540-6261.2006.01002.x
Pastor, L., & Stambaugh, R. F. (2009). Predictive regressions with time-varying coefficients. Journal of Finance, 64(4), 1503-1547. https://doi.org/10.1111/j.1540-6261.2009.01483.x
Smales, L. A. (2021). Geopolitical risk and stock market returns: Evidence from emerging and developed economies. Applied Economics, 53(29), 3399-3415. https://doi.org/10.1080/00036846.2020.1810745
Scheinkman, J. A., & Xiong, W. (2003). Overconfidence and speculative bubbles. Journal of Political Economy, 111(6), 1183-1219. https://doi.org/10.1086/378304
Siegel, J. J. (2003). What is an asset price bubble? An operational definition. European financial management, 9(1), 11-24.
Shannon, C. E. (1948). A mathematical theory of communication. The Bell System Technical Journal, 27(3), 379-423. https://doi.org/10.1002/j.1538-7305.1948.tb01338.x
Sutter, D., Anderson, M. R., & Kim, J. H. (2012). The role of asymmetric information in asset bubbles. Journal of Financial Markets, 15(2), 135-156. https://doi.org/10.1016/j.finmar.2011.09.001
Triki, T., & Maatoug, H. (2021). Geopolitical risk and its impact on the global financial markets: Evidence from Europe. Economic Modelling, 94, 456-473. https://doi.org/10.1016/j.econmod.2020.09.015
Umar, Z., Iqbal, A., & Yilmaz, K. (2022). The effects of geopolitical risk on stock market returns: Evidence from emerging and developed markets. Journal of International Financial Markets, Institutions and Money, 73, 101318. https://doi.org/10.1016/j.intfin.2021.101318
Veronesi, P. (2006). Technological revolutions and stock prices. Journal of Financial Economics, 79(3), 563-593. https://doi.org/10.1016/j.jfineco.2005.06.003
Wang, Z., Ma, X., & Xiong, Z. (2020). The relationship between economic conditions and price bubbles in financial markets. International Journal of Economics and Finance, 58(4), 87-101. https://doi.org/10.1016/j.ijef.2020.01.014
Yang, S., & Yang, H. (2021). The impact of geopolitical risk on stock market returns: Evidence from China. Asia-Pacific Journal of Financial Studies, 50(6), 1027-1053. https://doi.org/10.1111/ajfs.12307
Yang, S., & Li, Q. (2014). Emotional-to-price asymmetrical influence: A model for short-term price overreaction. Journal of Behavioral Finance, 15(1), 1-15. https://doi.org/10.1080/15427560.2014.898543
Yang, S., & Li, Q. (2013). Incorporating trader information into asset prices: A new model of asset pricing. Journal of Economic Behavior & Organization, 93, 1-15. https://doi.org/10.1016/j.jebo.2013.04.009
Zhang, Y., Li, Q., & Wang, J. (2019). Price bubbles and trade activity in financial markets. Economic Review, 45(2), 125-140. https://doi.org/10.1007/s11187-019-00224-5[
Zaremba, A., Cakici, N., Demir, E., & Long, H. (2022). When bad news is good news: Geopolitical risk and the cross-section of emerging market stock returns. Journal of Financial Stability, 58, 100964.