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When bad news is good news: Geopolitical risk and the cross-section of emerging market stock returns |
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| Affiliation: | 1. Montpellier Business School, 2300 Avenue des Moulins, 34185 Montpellier cedex 4, France;2. Department of Investment and Financial Markets,Institute of Finance, Poznan University of Economics and Business, al.Niepodległości 10, 61-875 Poznań, Poland;3. Gabelli School of Business, Fordham University, 45 Columbus Avenue, Room 510, New York, NY 10023, USA;4. Department of Business Administration, School of Social Sciences, Reykjavik University, Menntavegur 1, 102, 101 Reykjavík, Iceland;5. Istanbul Medeniyet University, Dumlupınar D100Karayolu No:98, 34720 Kadıköy/İstanbul, Turkey;6. School of Finance, Zhejiang University of Finance and Economics, 18 Xueyuan Street, Hangzhou City, Zhejiang Prov, China |
| Abstract: | Using a news-based gauge of geopolitical risk, we study its role in asset pricing in global emerging markets. We find that changes in risk positively predict future stock returns. The countries with the highest increase in geopolitical uncertainty outperform their counterparts with the lowest change by up to 1% per month. The anomaly is not explained by other established asset pricing effects and remains robust to many considerations. We link the observed phenomenon with investor overreaction to geopolitical news driven by the availability bias. |
| Keywords: | Geopolitical Risk Index The cross-section of stock returns Emerging markets Equity anomalies Asset pricing Return predictability Overreaction Availability heuristic Salience |
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