Khóa luận tốt nghiệp Tài chính ngân hàng: The impact of geopolitical risk on financial assets: evidence from time-varying parameter var

This study aims to explore the dependency structure between the index of geopolitical risk and stock market returns.. Research objectives The research objectives: To assess the influence

VIETNAM NATIONAL UNIVERSITY UNIVERSITY OF ECONOMICS AND BUSINESS

FACULITY OF FINANCE AND BANKING

THE IMPACT OF GEOPOLITICAL RISK ON FINANCIAL ASSETS:

EVIDENCE FROM TIME-VARYING PARAMETER VAR

LECTURER: Th.S NGUYEN HAI NAM STUDENT: NGUYEN THI YEN

STUDENT CODE: 19050783

CLASS: QH-2019E TCNH CLC 2 TYPE OF TRAINING: HIGH QUALITY

Hanoi, May 2023

VIETNAM NATIONAL UNIVERSITY UNIVERSITY OF ECONOMICS AND BUSINESS

FACULITY OF FINANCE AND BANKING

THE IMPACT OF GEOPOLITICAL RISK ON FINANCIAL ASSETS:

EVIDENCE FROM TIME-VARYING PARAMETER VAR

LECTURER: Th.S NGUYEN HAI NAM STUDENT: NGUYEN THI YEN

STUDENT CODE: 19050783

CLASS: QH-2019E TCNH CLC 2 TYPE OF TRAINING: HIGH QUALITY

Hanoi, May 2023

For the successful completion of my thesis report, I would like to express mysincere thanks to:

First of all, we would like to thank our instructor, Master Nguyen Hai Nam, for

wholeheartedly guiding me throughout the process of carrying out this scientific research

project I would like to thank you for your dedication and willingness to spend time to

comment and answer questions about the topic so that I can understand and completethis research paper

I would also like to thank the teachers in the Faculty of Finance - Banking inparticular and all the teachers of the University of Economics - VNU in general for creatinglearning conditions to help me improve my skills and abilities Self-study to complete thestudy well

Due to my limited knowledge and reasoning ability, | cannot avoid certainshortcomings We look forward to receiving your contributions to make this thesis topicbetter

Sincerely thank!

TABLE OF CONTENTS

DECLARATION 10 1n - 1

RECOGNITION 1 - 2

LIST OF 2/0091 e 5

LIST OF TABLES ĂãÍÃỶỶà 6

LIST OF FIGURES 0000 7

CHAPTER 1: INTRODUCTION - LH TH TH TH HH Hiện 8 1.1 Research background - TT HH Họ ch 8 1.2 Research objectÏVes HH HH 9 1.3 Research subjects and scope of S†Ud|y - - HH HH khe 9 1.4 Research Questions .- - - TH TH HH TH ch 9 1.5 Structure of the research QL ST HT n HT TH 10 CHAPTER 2: LITERATURE REVIEW - ST HH HH HH HH HH 11 2.0 Chapter introduction - - - 1n ng nọ HH kg 11 2.1 Theoretical baSes - HH HH và 11 2.1.1 Geopolitics and Geopolitical RISK cccecceeeeeteeeeneeeeeneeeteeaeeeeeneeesesaeeesenaeeeteeneeeeea 11 2.1.2 Measurement Geopolitical RISK .- - - «+ + + xEE+EkES* kh khu 14 2.1.3 Financial ASSCUS - s1 KH nh vi 15 2.2 Review of related litera†ure - - HS như 16 2.2.1 The positive impact of Geopolitical Risk on Financial Asse@fS - - +‹ 16

2.2.2 The negative impact of Geopolitical Risk on Financial ASSets -‹‹ 17

2.2.3 The uncertainty impact of Geopolitical Risk on Financial Assefs 19

2.3 Literature gap - - SH» HH HH kg 20 2.4 Chapter Summ4ry - - c1 SH TH HH kg 21 CHAPTER 3: METHODOLOGY - - Q0 22011221122 11211110 1111111111111 11H 1H Hy 22 3.1 Research methods - - - - LH kg 22 K)? nh e 4d 24 CHAPTER 4: EMPIRICAL RESULTS ĐÀ G22 11222 1221122111211 182111811 1 kg 27 4.1 Descriptive s†afiStÏCS - Ghi 27 4.1.1 SUIMIMALY S†AfÍSHÍŒS - - SE kg 27 4.1.2 Correlation Matrix taDle - + E181 81131111 SE 1kg vn 28 4.1.3 The development and volatility of (PF - - + + +5 ++++E++xekEx+xxeexexeersexeers 30 4.2 The Dynamic spillovers between financial assets of 12 sectors 31

4.2.1 Averaged AYNAMIC conrnecl@drI@SS - - «+ kg KH khi 31

4.2.2 Dynamic total connec†edn@SS - - - «c5 ST KH HH ki 34

4.2.3 Net directional connec†edfN@SS - - «1H ng kh 36

4.2.4 Summary of the results from TVP-VAR modl6l -‹«- «+ +£+<+*kkkxexeeeeeexexs 39

4.3 The impact of Geopolitical Risk on financial assets spillover 42

CHAPTER 5: CONCLUSION AND RECOMMENDATION ::ceccceescesseeeeeeeeeteeeeeeees 44

5.1 The research Contributions - - - - LH HH nhu 44

LIST OF ABBREVIATIONS

Abbreviations Full name

TVP - VAR Time - Varying Parameter VAR Model

GPR Geopolitical Risk

TCI Total Connectedness Index

FED Federal Reserve System

USD United States Dollar

COVID - 19 Coronavirus disease 2019

IEA International Energy Association

LIST OF TABLES

Table 4.1 Summary Statistics

Table 4.2 Correlation matrix

Table 4.3 Averaged dynamic connectedness

27

29

32

LIST OF FIGURES

Figure 2 1 GPR Index - Historical Chart

Figure 4.1 1 GPR Index

Figure 4.2 1 Dynamic total connectedness

Figure 4.2 2 Net directional connectedness

Figure 4.2 3 Network Plot

Figure 4.2 4 Wavelet Coherence: GPR and TCI

143034374042

CHAPTER 1: INTRODUCTION

1.1 Research background

In recent years, the world economic and political context has changed profoundly.

Major countries have been adjusting their strategies and policies to increase competitionand affirm their position in the international arena, leading to frictions, political conflicts

and many hot spots of conflict in many regions Geopolitical risk is a crucial factor for

investors to consider as it reflects the political stability of a country When a countryexperiences political instability, such as a coup, national conflict, terrorism, or corruption,

it can fundamentally alter the institutions or legal rules for the economy in that country

Geopolitical risks have always been among the top risks for organizations and businesses.

Conflicts cause loss of property, labor force, and even lead to a series of economicsanctions that make businesses unsustainable For example, the US-China trade war in

the previous period, starting from the end of March 2018, the US announced a 25% tariff

on 50 billion USD of Chinese goods, and officially implemented this in April 2018 July ofthat year China has also repeatedly responded with tariffs on goods imported from the

US In just two years, the US has taxed 25% on 250 billion USD of Chinese goods, and Chinaalso levied 25% tax on 110 billion USD of imports from the US The trade balance betweenthe two countries has shifted and has put pressure on economic growth The US-Chinatrade war affects macro factors related to inflation control and the prospect of economic

recession A sharp escalation of trade tensions could potentially have economic blows and

the metals group in general and the copper market in particular will be under

considerable pressure Now geopolitical risks are increasing and becoming a dilemma on

a global scale Since the emergence of the Covid-19 pandemic, these uncertainties havebecome more serious In Vietnam, in the past, people did not pay attention to and did nothave much access to the Vietnamese market But now, when the market is preparing toenter a period of inflation and economic decline with warnings being issued, geopoliticalrisks are gradually getting more attention

Geopolitical risks are also fluctuations related to tensions between states, threats

of war, internal military-related conflicts, and acts of terrorism For example, the conflictbetween Russia and Ukraine has dented the world's prosperity, but the deeper impact will

be felt when it translates into the major changes that have reshaped the global economy.any The conflict almost immediately added new uncertainties to the global economicdamage in addition to the Covid-19 pandemic, which has already led to record public debt,

a cost-of-living crisis caused by inflation and economic crisis labor shortages in essential

sectors Geopolitical risks can directly affect the production and business processes, as

well as the operational efficiency of enterprises In recent times, much empirical evidencehas shown the strong impact of GPR on both macroeconomic and microeconomicvariables High geopolitical risk leads to a decline in real activity, lower stock returns Theadverse effects of geopolitical risks are mainly driven by the threat of adverse geopoliticalevents Therefore, shocks of geopolitical risk have different effects on financial indicators

of the market

This study aims to explore the dependency structure between the index of

geopolitical risk and stock market returns The dependency structure in this study wasevaluated quite deeply by using the TVP-VAR method combining the GPR index by Caldaraand Jacoviello (2018) The period from February 2012 to April 2022 is covered toinvestigate the impact of political event shocks, its risks to the dependency structure inquestion This period was also chosen to focus specifically on the Russia-Ukraine war, theseries of missteps in the domestic stock and bond markets and the post-Covid-19

reopening to illustrate the disadvantage It's for financial asset returns Although there are many studies on the impact of geopolitical risk on financial assets, as far as we know,

there is almost no research on its impact on the profitability connection of the Vietnamese

securities industry Our findings have important implications for policymakers and

market participants in managing geopolitical risks

1.2 Research objectives

The research objectives: To assess the influence of Geopolitical Risk on Financial

Assets connectedness of Vietnamese stock sectors over the period from February 2012 toApril 2022 in the context of sharp fluctuations due to Geopolitical Risk such as the Russia

- Ukraine war, a series of mistakes in the stock and bond market, the world reopens afterCovid-19

1.3 Research subjects and scope of study

The research subject: Stock prices in the Vietnamese stock market

Scope of study: Research the volatility of stock prices of sectors in Vietnam’s stockmarket from February 2012 to April 2022

1.4 Research questions

Specifically, this thesis intends to answer the following three research questions:How will the GPR index move?

How is the volatility correlated between the assets of the stock prices of the sectors

on the Vietnamese stock market?

How much influence does GPR have on asset returns?

What is the relationship between geopolitical risk and the degree of financial assetlinkage of the Vietnamese securities industry?

Are the economic effects of higher geopolitical risk due to increased threats ofadverse events or to their implementation?

1.5 Structure of the research

This research consists of five chapters In chapter 1, we introduce the researchtopics, research objectives and research questions Next, we present the theoretical bases

as well as a review of the related literature at chapter 2 In chapter 3, we present researchmethodology, data sources and how we process those data Chapter 4 is the researchresult of the article Finally, chapter 5 includes our conclusions and recommendations onthe research problem

CHAPTER 2: LITERATURE REVIEW

2.0 Chapter introduction

In this chapter, we provide an overview of geopolitical risk and how risk

measurement can affect financial assets and discuss the theoretical transmissionmechanism for each We dive into this chapter to explore the link between geolocationrisk and stock market returns By examining both the empirical facts and the econometrictechniques used in previous studies, we can better understand how these two variablesinteract Finally, our study aims to draw attention to potential directions of investigationfor further exploration

2.1 Theoretical bases

The construction of the GPR index includes: definition, measurement.

We first describe the definition of geopolitics and geopolitical risk that we apply in

our article We then discuss how we built the index and describe its key features.

2.1.1 Geopolitics and Geopolitical Risk

Geopolitical Risk (GPR) is fluctuations related to tensions between states, threats

of war, internal conflicts related to military and acts of terrorism (Caldara) & Iacoviello,

2018) GPR can directly affect the production and business processes, as well as the

operational efficiency of enterprises In recent times, much empirical evidence has shown

the strong impact of GPR on both macroeconomic and microeconomic variables.

Specifically, geographical and political uncertainties affect economic output and growth(Akari et al., 2019; Lee & Lee, 2020), stock returns (Corbett et al., 2018)

Political risk reflects the political stability of a country This is an important factorfor investors to consider When a country has political instability, for example, a coup,national conflict, terrorism, corruption will fundamentally change the institutions orlegal rules for the economy in the country water This will result in the country'savailability to meet international payment obligations, balance of payments imbalances,

or simply restrict the investor's assets abroad

The expert from the World Bank said that geopolitical risks in the region and theworld such as the US's tough move on some international issues, the tense situation onthe Korean peninsula or the East Sea issue will change the flow of capital, making thecost of raising capital in the market become expensive Since the beginning of the year, theworld gold price has increased by about 9%, partly due to hedging buying because of

concerns about instability on the Korean peninsula, partly due to hedging buying politicalgeography.

Caldara and Iacoviello (2018) define geopolitical risk as "risks associated withwars, acts of terrorism, and tensions between states affecting the normal and peaceful

course of international relations" It is broadly defined as the exposure of one or more

countries to political actions in other countries Apparently events like Russia's Invasion

of Ukraine are considered geopolitical events However, many other events such asmilitary or terrorist actions and central bank or regulatory actions can also be interpreted

as geopolitical events Even local financial events, cyberattacks, trade wars and climate

change can have a global financial impact

Robert F Engle, geopolitical risk defines it as a general shock to the volatility of a

wide variety of financial assets Geopolitical events are expected to affect all countries, all

asset classes and all sectors The author uses the term GEOVOL to refer to such shocks.These shocks can be described as political, regulatory, military, terrorist or natural, butthe main feature is that they change the financial price of a very broad asset class

Vietnam is a large open economy, actively participating in the network of free trade agreements (FTAs) Therefore, the situation of political conflicts in some regions,

especially in the Asia-Pacific region; trade conflicts between economies; trend of trade

protection in the world; The adjustment of economic policies of major countries will have

both positive and negative impacts on the Vietnamese economy

@ Notable geopolitical events

1 Russia's Invasion of Ukraine

Beginning in February 2022 has had a significant and negative impact on the globaleconomy and financial markets As such, geopolitical risk has proven significant formacroeconomic outcomes such as corporate investment, GDP growth, and employment.The Russian-Ukrainian military conflict that began on 24 February 2022 has resulted in asharp increase in geopolitical risk (GPR) Without direct military intervention, majorWestern powers, including the United States, have imposed economic sanctions on Russia,criticizing Russia's invasion The Russian economy has been severely damaged byeconomic sanctions, such as the freezing of Russia's foreign exchange reserves Thisuncertainty has spilled over into the global economy, evident in the sharp rise in globalcommodity and energy prices

2 Gasoline shortage in many localities

In October and November, people in many localities have to wait in long queues to buy

petrol or only buy petrol according to the quota This situation is a consequence of

complicated developments in the world oil market and also reveals inadequacies in themanagement of petroleum business

In addition to the impact from the world, the reason for this year's market instability is

that the key businesses have to import goods at high prices, sell at low prices, so theysuffer losses; Petrol trading costs skyrocketed but were not adjusted in time to the baseprice At the same time, the Ministry of Industry and Trade revoked the license of

petroleum trading with 5 key enterprises in the South from 30 to 45 days, while there was

no scenario to respond and coordinate goods to compensate more "compensation".supply difficulties The petroleum market is currently stable after coordination effortsfrom the regulator The Ministry of Industry and Trade is submitting to competentauthorities to consider and amend a number of regulations on petroleum business(Decree 95/2022) to restore market order Amending Decree 95/ND-CP whether it willhelp the domestic petroleum market operate more smoothly is very important for 2023

Petroleum is the blood of the economy, it is impossible to let this situation repeat this

status.

3 Handling a series of violations in the stock and bond market

Corporate bond market - medium and long-term capital channel was negatively affected

when a number of cases related to corporate bond issuance were prosecuted Individualinvestors sell bonds ahead of time due to concerns that businesses will not be able torepay their debts

Speculative stocks such as FLC or Louis Holdings are targeted The leaders of theseecosystems, Trinh Van Quyet and Do Thanh Nhan, were charged with manipulating andblowing up stock prices The market was affected, the indexes plunged, along with adecrease in liquidity and investor confidence The sell-off spiked, especially in pennystocks and real estate With the bond market, after more than two years of boom, thisinvestment channel was suddenly tightened The high-speed spin was suddenly stopped,causing many businesses, even large-scale, to have liquidity problems Limiting investorparticipation and raising the requirement for private placement of bonds caused the value

of the issue to fall vertically Part of the reason comes from investors’ confidence, whenmany violations are prosecuted The first is the issuance of more than 9,000 billion dong

of bonds of Tan Hoang Minh, followed by Van Thinh Phat.

4 The world reopens after Covid-19

With the exception of China, all countries in the world have changed their responsestrategies to the Covid-19 pandemic in 2022 when transitioning to the new normal.However, the efforts to recover the economy after the pandemic of many countries facegreat challenges because the exhausted economies after two years of fighting the

epidemic have to face with high fuel prices, a food crisis and the risk of a pandemic chance

to fall into recession

2.1.2 Measurement Geopolitical Risk

Caldara and Iacoviello (2018) use keywords that are directly related to geopolitical

risks, geopolitical events, military-related tensions, nuclear tensions, war, and terroristthreats published to identify articles related to geopolitical risk

Real-time measurement of geopolitical risk as perceived by the press, the public,global investors and policymakers

(Source: Policy Uncertainty)

Figure 2 1 GPR Index - Historical ChartCaldara, Dario, and Matteo Iacoviello (2018) verify that the defining factors of

geopolitics are related to territory, country, nation, and leadership, and identify

geopolitical risk factors around danger war and terrorism

Group 1 includes words that explicitly refer to geopolitical risks, as well as words that describe military-related tensions Group 2 includes words that describe nuclear

stress Groups 3, 4 include words describing war threats and terrorist threats,respectively Groups 5 and 6 aim to capture press coverage of actual geopolitical events

as opposed to mere risk Direct search for geopolitical events in groups 5 and 6 played animportant role in our study First, adverse geopolitical events often cause an increase ingeopolitical risk Direct search for events rather than risks can provide more precisetiming of some risky shocks Second, when assessing the impact of geopolitical risk, we

want to control for the direct impact the event itself might have It is important that thewords included in these groups are intended to capture negative geopolitical events, such

as the start of a war - as opposed to positive, such as ending a war or negotiating peace.Like the news about the Covid-19 pandemic, the negative geopolitical events, when the

pandemic broke out - as opposed to the positive, when the pandemic was under control,

the world reopened

Geopolitical risk is often the explanation for poor investment results TypicalMarkowitz-style portfolios are expected to be low volatility, but they can be very sensitive

to volatility shocks As a result, assets that are not sensitive to volatility shocks can be

attractive in portfolios because they diversify geopolitical risk

To measure geopolitical risk, I use financial market prices that are assumed toincorporate all available information A statistical approach to estimation is introducedand tested theoretically, by simulation and data analysis I provide a monthly indicator ofgeopolitical risk based on a compilation of articles covering geopolitical tensions, andexamining its development and impact

The article uses stock prices on Vietnam's stock market: Industrial, Public Utilities,

Financial, Materials, Banks, Health Service, Customer Service, Oil, Consumer goods,Technology, Gold, Bitcoin In addition, we use Caldara and Iacoviello GPR (20218) to

represent GPR levels.

2.1.3 Financial Assets

A financial asset is a liquid asset that gets its value from a contractual right or

ownership claim Cash, stocks, bonds, mutual funds, and bank deposits are all examples of

financial assets Unlike land, property, commodities, or other tangible physical assets,financial assets do not necessarily have inherent physical worth or even a physical form

Rather, their value reflects factors of supply and demand in the marketplace in which they

trade, as well as the degree of risk they carry

Aside from cash, the more common types of financial assets that investorsencounter are: Stocks are financial assets with no set ending or expiration date An

investor buying stocks becomes part-owner of a company and shares in its profits and

losses Stocks may be held indefinitely or sold to other investors; Bonds are one way thatcompanies or governments finance short-term projects The bondholder is the lender, and

the bonds state how much money is owed, the interest rate being paid, and the bond's

maturity date; A certificate of deposit (CD) allows an investor to deposit an amount ofmoney at a bank for a specified period with a guaranteed interest rate A CD pays monthly

interest and can typically be held between three months to five years depending on thecontract.

® Characteristics of financial assetsCredit

The liquidity of a financial asset is the ease with which it can be converted to cash

in a short period of time There are two conditions to ensure the liquidity of each financialasset: the conversion, fast, and the conversion fee must be low

Calculate risk

Issues that threaten capital adequacy and income for investors in financial assets:

Market risk is often associated with the rise or fall of the market value of financial assets.Thus, treasury bonds, bank certificates of deposit are generally less risky than bonds or

stock companies Market risk is related to the growth of the market value of financial

assets The prices of stocks or bonds in the market can fluctuate up or down because ofchanges in the projections of inflation, business performance and other factors Inflationrisk or purchasing power risk is often present in the value of cash flows of financial assets

as a result of inflation when measuring purchasing power prices.

ProfitabilityThis is the ability to have income from financial assets for investors When trading

real estate or gold and silver, investors only expect prices to increase so that they can

make a profit On the contrary, if investing in stocks, investors not only benefit if the price

of the shares on the market increases higher than their par value, but they also receivedividends, benefit from the increase in the value of shares when accumulating internalassets corporate set increased

Liquidity and risk have an inverse relationship The more risky a financial asset,the lower its liquidity Therefore, the interest paid on that security will be high

2.2 Review of related literature

2.2.1 The positive impact of Geopolitical Risk on Financial Assets

Negative geopolitical events—for example, the start of a war—as opposed to

positive—for example, the end of a war or peace negotiations

Thomas C Chiang, This article investigates the impact of a change in EPU economicpolicy uncertainty and the absolute value of a change in GPR geopolitical risk on stockreturns, bonds and gold in the Chinese market - The paper uses the dynamic conditionalcorrelation (DCC) model of Engle (2009) and the rolling correlation model of Chiang(1988) to generate the correlation of asset returns over time and analyze their responses

to EPU and GPR Results - Evidence shows that bond-stock return correlation is negativelycorrelated with EPU, while stock-gold return correlation is positively related to AGPR butnegatively correlated with EPU This study finds evidence that stock returns have anegative relationship with risk/uncertainty as measured by downside risk, EPU andAGPR, while bond yields are positively related to the rise of EPU; Gold returns arepositively correlated with higher GPR.

Aslam and Kang (2015) found that terrorist attacks have a short-term negativeimpact on Pakistani stock returns, arguing that the magnitude of the effect depends on the

location and type of the attack Similarly, when examining the impact of both crisis and

war periods on the return of 12 stock markets in the Middle East and North Africa, Bouri(2014) points out that, despite war shocks and the financial crisis having disastrous

consequences in most of the markets studied, the benefits of regional diversification could

still be achieved

Aysan et al (2019) investigates the predictive power of GPR on Bitcoin returns andvolatility The applied methods are Bayesian Graphical Structural Vector Autoregressive

(BSGVAR), Ordinary Least Squares (OLS) and Quantile-in-Quantile (QQ) estimation The

BSGVAR econometric results reveal that changes in the global GPR represent thepredictability of Bitcoin returns and volatility Furthermore, the OLS estimates provide

evidence that changes in GPR cause a negative impact on Bitcoin's returns but a positive

impact on Bitcoin's volatility When related to the findings based on QQ techniques, theyindicate that geopolitical risk has a positive and statistically significant effect on the upperquartiles of both Bitcoin returns and volatility It is thought that Bitcoin can act as a hedgeagainst geopolitical risks

Baur and Lucey (2010) advocate that financial assets act as a hedge when they areuncorrelated or negatively correlated with alternative assets Furthermore, when theyexhibit hedging ability in extreme economic conditions, they are considered a safe haven.2.2.2 The negative impact of Geopolitical Risk on Financial Assets

To measure geopolitical risk, I use the geopolitical risk index developed by Caldara

and Iacoviello (2018) It is found that GPR is negatively and significantly associated with

stock market participation decisions The GPR index tracks the market's reaction to newsevents, such as the escalation of the COVID-19 pandemic, which jumped from 74 in

December 2019 to 138.42 in January 2020 At that point, supply-side risks spiked as

countries close their borders and impose travel restrictions to prevent the spread ofdisease

The GPR index is negatively correlated with market sentiment The higher up, themore bearish market sentiment as investments, jobs and stock yields come under

pressure.

Lee et al (2021a) investigates the impact of GPR on corporate finance using

Chinese stock market data Their findings indicate that GPR adversely affects a company's

financial activities At the same time, in the Chinese market, Chien-Chiang Lee & Chih-WeiWang (2021) also investigated the impact of GPR on the real economy, especially on thecash holdings of firms Second, provide evidence to demonstrate that financially

distressed companies are more likely to hold cash to protect themselves in the face of GPR.

Ultimately, the GPR weakened the manufacturing sector in China and slowed the country'sGDP growth Research shows that companies in manufacturing-related industries tend to

save more cash and protect themselves from spillover risk.

Among the BRICS stock exchanges, Balcilar et al (2018) notes that the Russianstock market bears the highest risk to GPR

Choi (2022) examines the impact of GPR on the stock markets of Northeast Asian

countries and shows a high interdependence between GPR and stock market volatility.

The results show that GPR has a negative impact on stock returns and volatility Second,the relationship between GPR and crude oil prices has been studied due to frequent

military tensions in oil-producing countries.

Kiryoung Lee (2023) finds that the geopolitical risk index (GPR) is significantlyassociated with both broad and deep range of stock market participation decisions TheGPR index covers the importance of economic policy uncertainty to stock marketparticipation decisions and has a lasting impact of up to 12 months The author furtherinvestigates the economic channel through which the GPR index is related to stock marketparticipation Empirical evidence suggests that it is the link between the GPR and financialuncertainty that drives outcomes However, I have found no evidence to support anuncertain income channel The results show that the GPR index, which is designed tocapture geopolitical risk, is negatively and significantly associated with stock marketparticipation decisions This result is strong for both the wide and deep range of stockmarket participation decisions as well as for overall performance The GPR includes theimportance of the EPU and it has a lasting effect on stock market participation

Anupam Dutta (2022) using a two-state Markov-mode transition model shows

that an increase in the GPR increases (decreases) the likelihood of it occurring in a low

(high) volatility regime This finding may be because as geopolitical risks increase, crude

oil users, which are sensitive to that risk, tend to see clean energy as an alternative to

traditional energy sources This caused a growth in the share prices of new energy

companies, which further led to a decrease in volatility In addition, the results ofgeneralized self-regressive conditional variance (GARCH) models also confirm that higherGPR implies lower risk for these green assets

Sokratis Mitsas, Petros Golitsis & Khurshid Khudoykulov (2022) modelingvolatility through exponential generalized autoregressive conditional variance(EGARCH), provide evidence that GPR and GPT are not only impact but also had an

adverse effect on the returns of crude oil, gold, platinum and silver, while GPA negatively

affected the returns of crude oil, heating oil, platinum and sugar futures Furthermore,GPT has a weakly positive effect on the volatility of corn futures

2.2.3 The uncertainty impact of Geopolitical Risk on Financial Assets

Zaghum Umar (2022) GPR has a more profound negative effect on European bondsthan on Russian bonds A similar observation applies to equities, where the magnitude ofthe positive effect of GPR on European bonds is higher than on Russian bonds The authorinvestigates the impact of geopolitical risk (GPR) posed by the Russia-Ukraine conflict onEuropean and Russian global bond, equity and commodity markets The author uses theGPR index and applies the quantum-on-quantum regression method to the GRP index andfinancial asset returns Findings indicate that (i) most assets have a positive and negativerelationship with GPR; (ii) GPR results in a change in asset returns under normal marketconditions; and (iii) the extent and direction of GPR's influence on asset returns depends

on the type of market and market conditions Specifically, GPR positively affects Russian

equity across all GPR equity and return percentiles The positive relationship betweenGPR and Russian equity is strong in the higher (lower) wealth percentiles GPR has a

deeper negative effect on European bonds than on Russian bonds A similar observation

applies to equities, where the magnitude of the positive effect of GPR on European bonds

is higher than on Russian bonds

While, Balcilar et al (2018) notes that among the BRICS stock markets, the Russian

stock market bears the highest risk to GPR, while Mehmet Balcilara, Matteo Bonato,Riza

Demirer, Rangan Guptab (2018) have a broader finding in In the BRICS stock markets,Russia bears the greatest risk to GPR in terms of both returns and volatility, and India is

considered the most resilient BRICS country of the bunch The study examines the impact

of geopolitical uncertainty on returns and volatility dynamics in the BRICS stock marketthrough nonparametric quantile causality tests The impact of geopolitical risk (GPR) was

found to be heterogeneous across the BRICS stock markets, suggesting that news related

to geopolitical tensions does not affect the dynamics ofreturn in the BRICS stock markets.

this market in a uniform manner GPR is generally thought to have an impact on stockmarket volatility measures rather than returns and is often at below-average return

percentiles, suggesting the role of GPR as a driver of bad volatility in these markets.

Hasanul Banna, Ph.D (2021) studies the impact of geopolitical uncertainty onbanking risk This finding remains robust when using GPR alternatives, such asgeopolitical behavior (GPRA), historical GPR, and US-specific GPR indices Medium and

large banks, as measured by total assets and total loans, and banks that specialize in

commercial and savings banking are riskier when GPR is high The increased bank risk ismainly due to a decrease in bank capital and escalating volatility in bank profitability

Quantitative regression shows that the association between GPR and bank risk is not

affected by the existing risk level of the bank The basic findings persisted after a series ofendurance tests based on change-as-change regression Banks are more vulnerable toincreased war-induced geopolitical uncertainty, such as war threats, military build-up,

nuclear threats, war initiation and war escalation Finally, we find that the adverse effect

of GPR is mediated by bank goodwill, capital adequacy, management quality, and certain

types of bank loans

Several other studies focused on the impact of GPR on safe-haven assets like gold

and bitcoin For example, Baur and Smales (2020) and Triki and Maatoug (2021) see gold

as a safe haven and a diversifier against GPR Aysan et al (2019) notes bitcoin as apotential hedge against GRP

2.3 Literature gap

It can be seen that, so far, there are a large number of studies exploring the impacts

of geopolitical risk including positive, negative and non-linear effects Compared with

previous studies, which focused on developed countries, for example, those belonging toG7 or G20, this study focuses on developing countries As a matter of fact, the studiesfocusing specifically on the Vietnamese stock market are still limited Vietnam's stock

market is still considered a frontier market when there are stocks with high growth

potential

In addition, the majority of existing studies only focus on a few typical industries,

between 2 and 3 key industries in the stock market: gold, bitcoin, bank, Therefore, a

considerable contribution of this study compared to previous studies is that we collect

stock prices of all companies listed on the stock exchange and then divide them into 10industries.

Next, the study period focuses on the period from which corresponds to theperiod of conflict between Ukraine and Russia while this also represents the post-

pandemic recovery period Because of that, there are various fluctuations in the energy

market during such a period

All in all, this study will give a better overview of the relationship betweengeopolitical risk and stock return’s spillover in the Vietnamese stock market considering

data from a variety of industries.

2.4 Chapter summary

Chapter 2 presents an overview of geopolitical risk and how risk measurement canaffect financial assets Chapter 2 then presents a review of the existing domestic andforeign studies on the positive, negative and non-linear effects of geolocation risk on stockmarket returns From there, it is possible to detect the gap in the literature as well as thepotential contributions of this research

CHAPTER 3: METHODOLOGY

3.1 Research methods

In order to explore the dynamic connectedness in a time-varying manner, I employthe TVP-VAR approach introduced by Antonakakis and Gabauer (2017) The TVP-VARmethodology combines the connectedness approach of Diebold and Yilmaz (2009, 2012,2014) and Koop and Korobilis (2014) This framework allows the variances to vary overtime via a Kalman Filter estimation with forgetting factors The TVP-VAR(p) model can beexpressed as:

Ve = BrZt-1 + & €¢1Ft-1~N (0, S;) (1)

vec(By) = vec(By_-1) + % #y|F¿_—+~N(0, Re) (2)

where y; and Z;_¡ = [y;~, ,y¿—p]' respectively represent N x 1 and Np x 1 dimensional

vectors 6, is an N X Np dimensional time-varying coefficient matrix and €; is an N x 1dimensional vector of error disturbance with an N x N time-varying variance-covariance

matrix, S; øec(;),0ec(,_;) and 4% are N?p x1 dimensional vectors and R; is an

Nˆ?p x N?p dimensional matrix.

In order to calculate the generalised impulse response functions (GIRF) and

generalised forecast error variance decomposition (GFEVD) (Koop et al., 1996; Pesaranand Shin, 1998), we need to transform the TVP-VAR to a TVP-VMA using the Wold

representation theorem:

Ye =X7>o LWLe¿—; (3)

Min 37=o Ak€t_j (4)

where L=[Iy, ,0p]’ is an NpXN_ dimensional matrix, W=

[:; u(p—+›Ôn(-1)xN| is an Np X Np dimensional matrix The GIRFs represent the

responses of all variables following a shock in variable i We compute the differences

between a J-step-ahead forecast where once variable i is shocked and once where variableiis not shocked The difference can be accounted to the shock in variable i, which is given

by:

GIRF,(J, Ổj, F,_1) = E( /|£/z — i,t, Fy_1) — EŒ+;|F:_1) (5)

where COD) is the GIRFs of variable j, J represents the forecast horizon, ở;¿; is the

selection vector with value of one on the j-th position and zero otherwise, and F,_, is theinformation set until t — 1 Then, we compute the GFEVD that can be interpreted as thevariance share one variable has on others The calculation is as follows:

MT ent

bi, D = sr gta

i,t

(8)

total connectedness index (TCI) as follows:

cÿ0)= ZU=ue)_ Pie Lisi Fie x 100 = Zijeuie) Pipe x 100 (9)

rier O50)

The connected approach allows to examine how a shock in one variable spills over

to other variables First, the shock transmitted from variable i to all other variables j, i.e

the total directional connectedness TO others can be defined as:

we 1,Í#j %0)

C2440) = = SNI, a.) 100 (10)x

Second, the shock that variable i receives from all other variables j, i.e the total

directional connectedness FROM others can be defined as:

1,i4j bi, c0)

Finally, the net total directional connectedness can be given by subtracting the totaldirectional connectedness TO others from the total directional connectedness FROMothers:

This net total directional connectedness can be interpreted as the influence of

variable í on the analyzed network If the net total directional connectedness of variable i

is positive, this variable influences the network more than being influenced by it This also

means that variable ï is a shock transmitter On the other hand, if the net total directional

connectedness is negative, variable i is driven by the network, meaning that it is a shock

receiver.

As the net total directional connectedness is an aggregated measure and