EFFECTS OF GEOPOLITICAL RISKS AND POLITICAL UNCERTAINTIES ON STOCK MARKETS: COUNTRY SPECIFIC NEW GENERATION PANEL DATA ANALYSIS FOR DEVELOPING ASIAN COUNTRIES

Hatıra Sadeghzadeh Emsen

doi:10.5937/jpmnt10-38252

Hatıra Sadeghzadeh Emsen Atatürk University, Oltu Faculty of Humanities and Social Sciences, Department of Business Administration, Erzurum, Turkey

DOI: https://doi.org/10.5937/jpmnt10-38252

Sažetak

In general, there are strong and meaningful relationships between risks and uncertainties, and economic activities. In this context, geopolitical risks (GPR) and global economic and political uncertainties (WUI) can significantly affect financial markets and investor behavior. In this study, the effects of GPR and WUI on stock markets for 10 developing Asian countries were investigated for 2001:M07-2020:M12 period. Cross-section dependency was examined with LM, and tests, series stationarity with Hadri and Kurozumi (2012) test, cointegration relations with Westerlund (2006) cointegration with multiple structural breaks method, and regression analyzes with Eberhardt and Bond (2009) method. It was determined that high GPR decreases the stock market index in Turkey, Korea, Russia, Indonesia and Malaysia, whereas it increases in India, Thailand and Philippines. It was found that high WUI decreases the stock market index in Korea, China, Indonesia and Thailand, whereas it increases in Turkey, India and Malaysia. On the other hand, while the stock market returns of the change in GPR decreases the stock market returns in Turkey, Korea, Russia, Indonesia and Malaysia, it increases in India, Thailand and Philippines. It has been determined that change in WUI decreases the stock return in Korea, China, Indonesia and Thailand, and it increases in Turkey, India and Malaysia. It was also observed that changes in GPR increases the volatility of the stock markets in India, Thailand and Philippines, and it decreases in Turkey, S. Korea, Russia, Indonesia and Malaysia. While the effects of change in WUI increases stock market volatility in Turkey and Malaysia, it decreases in Korea, China, Indonesia and Thailand. As the results achieved are heterogeneous, investors should avoid a basket trading strategy in these countries. Country-specific causality test was carried out with the Konya (2006) method, and it was observed that there are causal relationships between high WUI and stock market index, high WUI and stock market return in Turkey. Similarly, causal relationships were determined between high WUI and stock market index in India, between change in WUI and stock market index volatility in Philippines, between high GPR and stock market index, change in GPR and stock market return in Hong Kong. Causal relationships for all countries in the panel were examined using the Dumitrescu and Hurlin (2012) method, and causality was only found between high WUI and stock market index.

Reference

Ahir, H., Nicholas, B., & Davide, F. (2018). The World Uncertainty Index. Available at SSRN 3275033.

Alqahtani, A., & Martinez, M. (2020). US Economic Policy Uncertainty and GCC Stock Market. Asia-Pacific Financial Markets, 27(3), 1-11.

Apergis, N., Bonato, M., Gupta, R., & Kyei, C. K. (2017). Does Geopolitical Risks Predict Stock Returns and Volatility of Leading Defense Companies? Evidence from a Nonparametric Approach. Defence and Peace Economics, 29(2), 1-13.

Asteriou, D., & Sarantidis, A. (2016). Political Instability and Stock Market Return: Evidence from OECD Countries. Economics and Business Letters, 5(4), 113-124.

Baker, S R., Bloom, N., & Davis, S. J. (2016). Measuring Economic Policy Uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636.

Balcilar, M., Bonato, M., Demirer, R., & Gupta, R. (2018). Geopolitical Risks and Stock Market Dynamics of the BRICS. Economic Systems, 42(2), 295-306.

Balcilar, M., Gupta, R., Pierdzioch, C., & Wohar, M. E. (2016). Terror Attacks and Stock- Market Fluctuations: Evidence Based on a Nonparametric Causality-in-Quantiles Test for the G7 Countries. European Journal of Finance, 24(4), 333-346.

Baltagi, B. H, Feng, Q., & Kao, C. (2012). A Lagrange Multiplier test for Cross-sectional Dependence in a Fixed Effects Panel Data Model. Journal of the Econometrics, 170, 164-177.

Baltagi, B.H., & Pesaran, M.H. (2007). Heterogeneity and Cross Section Dependence in Panel Data Models: Theory and Applications Introduction. Journal of Applied Econometrics, 22(2), 229-232.

Breusch, T.S., & Pagan, A. R. (1980). The Lagrange Multiplier Test and Its Applications to Model Speciﬁcation Tests in Econometrics. Review of Economic Studies, 47, 239-53.

Caldara, D., & Iacoviello, M. (2019). Measuring Geopolitical Risk. https://www.matteoiacoviello.com/gpr_files/GPR_PAPER.pdf, (28.04.2021).

Chowdhury, A. R. (1993). Does Exchange Rate Volatility Depress Trade Flows? Evidence from Error Correction Models. The Review of Economics and Statistics, 75(4), 700-706.

Das, D., Kannadhasan, M., & Bhattacharyya, M. (2019). Do the Emerging Stock Markets React to International Economic Policy Uncertainty, Geopolitical Risk and Financial Stress Alike?. The North American Journal of Economics and Finance, 48, 1-19.

Dash, S. R., Maitra, D., Debeta, B., & Mahakud, J. (2019). Economic Policy Uncertainty and Stock Market Liquidity: Evidence from G7 Countries. International Review of Finance, 21(2), 611-626.

Dumitrescu, E. I., & Hurlin, C. (2012). Testing for Granger Non-Causality in Heterogeneous Panels. Economic Modelling, 29(4), 1450-1460.

Eberhardt, M., & Bond, S. (2009). Cross-section Dependence in Nonstationary Panel Models: A Novel Estimator. MPRA Paper, No. 17870.

Enamul Hoque, M., & Zaidi, M. A. S. (2020). Global and country-Specific Geopolitical Risk Uncertainty and Stock Return of Fragile Emerging Economies. Borsa Istanbul Review, 20(3), 197-213.

Enamul Hoque, M., Soo Wah, L., & Azlan Shah Zaidi, M. (2019). Oil Price Shocks, Global Economic Policy Uncertainty, Geopolitical Risk, and Stock Price in Malaysia: Factor Augmented VAR Approach. Economic Research, 32(1), 3701-3733.

Engle, R.F., & Granger, C.W. J. (1987). Cointegration and Error-Correction: Representation, Estimation and Testing. Econometrica, 66, 251-276.

Fama, E. (1991). Efficient Capital Markets: II. The Journal of Finance, 46(5), 1575–1617.

Friedman, M. (1957). A Theory of the Consumption Function. Princeton University Press, Princeton.

Gilal, M. (2019). Economic Policy Uncertainty and Stock Market Returns in Indonesia. DOI: 10.13140/RG.2.2.10905.88168.

Granger, C. W., & Newbold, P. (1974). Spurious Regressions in Econometrics. Journal of Econometrics, 2(2), 111-120.

Hadri, K., & Kurozumi, E., (2012). A Simple Panel Stationarity Test in the Presence of Serial Correlation and a Common Factor. Economics Letters, 115, 31–34.

Hardouvelis, G., Karalas, G., Karanastasis, D., & Samartzis, P. (2018). Economic Policy Uncertainty, Political Uncertainty, and the Greek Economic Crisis. SSRN Electronic Journal, DOI:10.2139/ssrn.3155172, 1-130.

Hasan, M., Naeem, M.A., Arif, M., Shahzad, S. J. H., & Nor, S. M. (2020). Geopolitical Risk and Tourism Stocks of Emerging Economies. Sustainability, 12(21), 9261.

Hoque, M. E., & Zaidi, M. A. S. (2019). The Impacts of Global Economic Policy Uncertainty on Stock Market Returns in Regime Switching Environment: Evidence from Sectoral Perspectives. International Journal of Finance & Economics, 24(2), 991-1016.

Kannadhasan, M., & Das, D. (2019). Do Asian Emerging Stock Markets React to International Economic Policy Uncertainty and Geopolitical Risk Alike? A Quantile Regression Approach. Finance Research Letters, 34, 1012761.

Karacaer Ulusoy, M., & Pirgaip, B. (2019). The Casual Relationship between Economic Policy Uncertainty and Stock Market Returns. Journal of Atatürk University Social Science Institute, 23, 2239-2251.

Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. Macmillan Cambridge University Press.

Knight, F. (1921). Risk, Uncertainty, and Profit. University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship. Available at SSRN: https://ssrn.com/abstract=1496192.

Konya, L. (2006). Exports and Growth: Granger Causality Analysis on OECD Countries. Economic Modelling, 23(6), 978-992.

Langer, E. (1975). The Illusion of Control. Journal of Personality and Social Psychology, 32(2), 311-328.

Liu, L., & Zhang, T. (2015). Economic Policy Uncertainty and Stock Market Volatility. Finance Research Letters, 15, 99-105.

Muradoglu, G., & Harvey, N. (2008). Behavioural Finance: The Role of Psychological Factors in Financial Decisions. Review of Behavioural Finance, 4(2), 68–80.

Pesaran, M. H. (2004). General Diagnostic Tests for Cross Section Dependence in Panels. Cambridge Working Papers in Economics, No. 0435.

Rawat, A. S., & Arif, I. (2018). Does Geopolitical Risk Drive Equity Price Returns of BRIC Economies? Evidence from Quantile on Quantile Estimations. Journal of Finance and Economics Research, 3(2), 24-36.

Schettkat, R. (2018). The Behavioral Economics of John Maynard Keynes. Schumpeter Discussion Papers.

Sekmen, T. (2020). Geopolitical Risks and Stock Market Behavior in Developing Countries: A Time-Varying Causality Approach. Journal of Social Sciences, Eskişehir Osmangazi University, 21(2), 359-381.

Sum, V. (2012). The ASEAN Stock Market Performance and Economic Policy Uncertainty in the United States. Economic Papers: A Journal of Applied Economics and Policy, 32(4), 512-521.

Sun, C., Kim, M., Koo, W., Cho, G., & Jin, H. (2002). The Effect of Exchange Rate Volatility on Wheat Trade Worldwide. Center for Agricultural Policy and Trade Studies, Department of Agribusiness and Applied Economics. No. 1187-2016-93730.

Ucler, G., & Ozsahin, S. (2020). Causality Analysis of Geopolitical Risks and Stock Market Indices: A Bootstrap Panel Causality Test on Developing Countries. The Journal of Accounting and Finance, 87, 167-180.

UNCTAD (2021). World Economic Situation and Prospects 2020. https://unctad.org/webflyer/world-economic-situation-and-prospects-2020, (28.04.2021).

Westerlund, J. (2006). Testing for Panel Cointegration with Multiple Structural Breaks. Oxford Bulletin of Economics and Statistics, 68(1), 101-132.

Wu, W., Lijun W., Erzurumlu, Y. O., Gözgör, G., & Gaoju, Y. (2022). Effects of Country and Geopolitical Risks on Income Inequality: Evidence from Emerging Economies. Emerging Markets Finance and Trade. 1–13.

Yıldırım, N. E., Üre, S., & Karaköy, Ç. (2021). Credit Rating Agencies and Their Effects: An Analysis on Balkan Countries. Journal of Process Management and New Technologies 9(3–4), 28–48.