Geopolitical risks and financial stress in emerging economies

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We investigate the impacts of geopolitical risks (GPRs) on financial stress (FS) in major emerging economies from 1985 to 2019. Applying a recently developed panel quantile estimation method, we show that GPRs pose serious risks to the stability of the financial condition in emerging economies. Namely, when FS is already equal to or above average, GPRs intensify this instability to a remarkable degree. Nevertheless, GPRs do not ignite the stress when the financial situation is benign. In emerging economies, foreign exchange markets and, to a lesser extent, the banking industry and the debt market suffer more severe consequences of geopolitical tensions than the stock market. In contrast, advanced economies, represented by the Group of Seven (G7), have witnessed detrimental consequences of GPRs on their stock markets, but negligible effects on other parts of their financial systems.

Original languageEnglish
JournalWorld Economy
Issue number1
Pages (from-to)217-237
Number of pages21
Publication statusPublished - 01.2024

Bibliographical note

Funding Information:
We thank the editor for the opportunity to improve and resubmit our manuscript, Prof. Turcu, Prof. Afonso, Prof. Badarau, two anonymous reviewers, participants of the 23rd INFER Annual Conference and Leuphana IVWL workshops for constructive comments and Dr. Park (ADB) for sharing data. Open Access funding enabled and organized by Projekt DEAL.

Publisher Copyright:
© 2023 The Authors. The World Economy published by John Wiley & Sons Ltd.

    Research areas

  • banking sector, debt market, emerging economies, financial stress, foreign exchange market, geopolitical risks, stock market
  • Economics