When bad news is good news: Geopolitical risk and the cross-section of emerging market stock returns

Zaremba A., Cakici N., Demir E., Long H.

JOURNAL OF FINANCIAL STABILITY, vol.58, 2022 (Peer-Reviewed Journal) identifier identifier

  • Publication Type: Article / Article
  • Volume: 58
  • Publication Date: 2022
  • Doi Number: 10.1016/j.jfs.2021.100964
  • Journal Indexes: Social Sciences Citation Index, Scopus, EconLit
  • Keywords: Geopolitical Risk Index, The cross-section of stock returns, Emerging markets, Equity anomalies, Asset pricing, Return predictability, Overreaction, Availability heuristic, Salience, IDIOSYNCRATIC VOLATILITY, FINANCIAL-MARKETS, EXPECTED RETURNS, CAPITAL-MARKETS, POLITICAL RISK, TAIL RISK, MOMENTUM, UNCERTAINTY, TERRORISM, BEHAVIOR


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.