Geopolitical Risks and Movements in Islamic Bond and Equity Markets: A Note

Abstract

This study applies a non-parametric causality-in-quantiles test to examine the causal effect of geopolitical risks on return and volatility dynamics of Islamic equity and bond markets.Geopolitical risks are generally found to impact Islamic equity market volatility measures, rather than returns. However, Geopolitical risks tend to predict both returns and volatility measures of Islamic bonds. Interestingly, causality, when it exists for returns and/or volatility of Islamic equities and bonds, is found to hold over entire conditional distributions of returns and volatilities, barring the extreme ends of the same.

Oil price shocks, global economic policy uncertainty, geopolitical risk, and stock price in Malaysia: Factor augmented VAR approach

“…Geopolitical risk is found to have insignificant positive impacts in the short run, but negative impacts are observed in the long run. These finding are consistent with those of Balicilar et al (2016) and Caldara and Iacoviello (2018), while they are contradictory to those of Apergis et al (2017), Bouri et al (2018), and many others. Still, based on the findings of Balcilar et al (2018) and Iacoviello (2018), it can be implied that although geopolitical risks do not affect stock price significantly, it can create volatility in the stock market return.…”

“…Employing the geopolitical risk index, Apergis et al (2017) find that geopolitical risk is able to predict return volatility in 50% of the stocks of defense companies. Similar findings are observed in the study of Bouri et al (2018) that geo-political risk index predicts returns and volatility of Islamic equities and bonds.…”

“…Fourth, this study shows that geo political risk shocks have indirect impacts on the Malaysian stock market, hence confirming that geopolitical risk shock transmits through global economic policy uncertainty and oil price shocks. Such findings add new evidence to the existing studies that there is a passthrough effect of geopolitical risk (Antonakakis et al, 2017;Apergis et al, 2017;Apergis & Apergis, 2016;Arin, Ciferri, & Spagnolo, 2008;Aslam & Kang, 2015;Balcilar, Bonato, Demirer, & Gupta, 2018;Bouri et al, 2018;Henriques & Sadorsky, 2008;Kesicki, 2010;Kollias et al, 2013). Fifth, this study confirms that global economic policy uncertainty shocks have negative influences on all sectoral stock price, which are consistent with extant studies on global economic policy uncertainty and stock price nexus (Arouri, Rault, & Teulon, 2014Chang, Chen, Gupta, & Nguyen, 2015;Liu, Ye, Ma, & Liu, 2017, Sum, 2013Tsai, 2017).…”

“…Theoretically speaking, if the domestic economy and stock market remain strong during geopolitical risk shocks, it is possible that the shocks may not influence the stock market performance directly and significantly in the short term. However, global geopolitical tension could create uncertainties and influence investors' risk behavior through global policy uncertainty and oil shock, thus leading to volatilities in the stock market (see, Balcilar et al, 2018;Bouri et al, 2018). In support of this assertion, variance decomposition results reported in Table 3 also suggest that there exists a possibility that the effects of geopolitical risk transmit through global policy uncertainty and oil supply shock given that it has significant power in explaining some of the variances in both global economic policy uncertainty and world oil production shocks factors.…”

Effects of the geopolitical risks on Bitcoin returns and volatility

“…The GPR index impacts the stock market volatility rather than returns at return quantiles below the median. Likewise, Bouri et al (2018a) also show that the GPR affect Islamic equity market volatility rather than returns. Cheng and Chiu (2018) show that the GPR has an important role in terms of explaining the business cycle fluctuations in emerging countries.…”