Research

Abstract

We study the asset pricing implications of geopolitical tensions using nearly 100 years of data. Leveraging widely adopted news-based geopolitical risk indices, we find that geopolitical threats (GPT) and acts (GPA) have markedly different effects. GPT aligns closely with geopolitical risk perceptions and decisions of investors and firms. Thus, GPT is priced across individual US stocks, equity anomalies, international equity and bond indices, and it forecasts country-level equity premia. In contrast, GPA exhibits weaker and less stable links to the beliefs and decisions of investors and firms as well as to variation in risk premia across assets and over time. Importantly, our results are incremental to existing news-based indices of macro-financial uncertainty, including those capturing war-related discourse and economic or trade policy risk. Overall, our findings underscore the importance of forward-looking measures like GPT for understanding how news-based uncertainty affects investment decisions and asset prices