Khóa luận tốt nghiệp Tài chính ngân hàng: Effect of Geopolitical risks on stock market volatility

VIETNAM NATIONAL OF ECONOMIC AND BUSINESS, VIETNANATIONAL UNIVERSITY, HANOI BANKING AND FINANCE DEPARTMENT TOPIC THE EFFECT OF GEOPOLITICAL RISKS ON STOCK MARKET VOLATILITY Student : Ngu

VIETNAM NATIONAL OF ECONOMIC AND BUSINESS, VIETNA

NATIONAL UNIVERSITY, HANOI BANKING AND FINANCE DEPARTMENT

TOPIC

THE EFFECT OF GEOPOLITICAL RISKS

ON STOCK MARKET VOLATILITY

Student : Nguyen Thi Phuong Linh Student code : 19050682

Class : QH 2019-E TCNH CLC 1

Supervisor : MSc Luong Tram Anh

re F7/

VIETNAM NATIONAL OF ECONOMIC AND BUSINESS, VIETNA

NATIONAL UNIVERSITY, HANOI BANKING AND FINANCE DEPARTMENT

TOPIC

THE EFFECT OF GEOPOLITICAL RISKS

ON STOCK MARKET VOLATILITY

Student : Nguyen Thi Phuong Linh Student code : 19050682

Class : QH 2019-E TCNH CLC 1

Supervisor : MSc Luong Tram Anh

re F7/

I hereby declare that the topic “Effect of Geopolitical risks on stock market volatility”

is an independent research work with all contents and the result is a product that I havetried my best to research during my studies at the school, conducted openly with theenthusiastic guidance of MSc Luong Tram Anh

The data and research results on the topic are honest, and the sources are fully andclearly cited The research results do not completely copy or use the results of anysimilar topic If I find out that there is a copy of the research results of another topic, Iwill take full responsibility

Hanoi, 15 May 2023

Student

Nguyễn Thị Phương Linh

TABLE OF CONTENTS

DECLARATION scsssssssssesssensensonsatensensonsanensensoneoneaeensonsaneatensonsoueateneensoneateseeneonsansateneensaueatenteneanenteneeneas 1

TABLE OF CONTENTS cscssssssssssssssssssessessssstensecserssessrensocsacstensecseneseenteesacsstsatentensansueneensaeeaueatesanees 2

LIST OF ABBREVIATION cssssssssssssssssssessessnsnsseeessensnensessueneseecensausneaeeesseaneneensnesueneaeeneneenensaeensanen 4

LIST OF FIRGURES cscsscsssssssssesssessnsseeesessenssneseenssnsaneeenesessneaeeneenseesseeseenssnsaneateneansaueneensensaneateeenees 5LIST OF TABLES ccssscssssssssssssnssesssesesnssnenesssensoneeenssnsanentenssnsassatensenseesseeseensonsaceteneeesausatensenssueaueneenees 5

ABSTRACT ovessssssssessesseseessensoreneensecsorsansneeseareausreneecsansatenseneacsanenteneansaneanenseneansateneeneonsansateneeneeneanensensans 6

CHAPTER 1: INTRODUCTION csssssssssssssssseesssessesnsnsensnsenensessnensausneeeesseensneensnesuenenenenneneneanensenes 7

1.1 The rational of research tODIC « «sssseseseseseskskskreierrrsikisrrrrsrsrsrsrae 71.2 ReSse@arch aim scsecccssssssssssesesssessssssessseeesssseseeeseasseeeseeseseseesaneseseeaeaeenenseesesaeenenenseeseeeatenenees 81.3 Research QUestiOns csssssssssssssessssssssssessessesesessessseseesessneeecaeessenseseseesseeseseseeasaesennieeeeeaes 81.4 Research Objective and SCODG ««ssssesesrkxerErkkrsrsrrsrrrrrrrrsrsrsrsrsrsrsrsrse 9

1.4.1 Research Obj©CtÏVe -.-.ssesrsrskkEEeiirkkiiikrsrsisierrie 91.4.2 ResearCH SCOJD€ «se cseererrsrrrrstrrsrrrrrsrrsrrsisrsrrrrsaiirsiiirrsrrrsrsrrstsrie 101.5 Overview of data collection and data arnaÌÏySÌS «-««<«<e<e<esesesesee 101.6 Contribution Of research ccscssscssssssseseesesesesseseesesseecessseseeaseeesesserseeeseseseeeseneneeeess 101.7 Structure Of the Study «e-eeesrsesersrsrrsrirerirerrrrrrrrrrsrsrarsrsrsirsrnrre 10

CHAPTER 2: LITERATURE REVIEW «share 11

2.1 Impact of geopolitical risks on StOCK MarKet e«c<c<s<ss<ssssssesesesesrse 112.2 Impact of macroeconomic factors on StOCK MAFKet sce 13

CHAPTER 3: RESEARCH METHODOLOGY 5-5 sseseseskesrEerrsrrrsrrrsisrrsrsre 16

3.1 RES@ arch DFOC©SS «chien 163.2 Data CON OCTION ccsscssssesssssessessseseeseseeeseseeeeeessseeeseeseseaeesecenseseaeeeeseneeseeaeaseeeneeeeeenaeaeeeeneeaeas 173.3 Research method csssssssssssssssessssssssssssessssesssessssseseseesssesessseeeessesenseeseeeesenseeseeneesesensseaeas 18

CHAPTER 4: RESULT AND DICUSSION e-ce«cssesersersrrrrririirrrirrsrrrsarsree 21

4.1 The general impact of geopolitical risk on stock marketS - 214.2 The impact of geopolitical risk on stock markets different between

developed and developing COUTItTÏ@S? -.«« «series 25

REFERENCES ccsssssssssssssssssseseesesesesescsesseseseacneensnsseesessneeseaeseaeaeaeeneneeauaceseaeseneaeaeaneseneseneavaneneeeneaeaeas 39

LIST OF ABBREVIATION

STT ABBREVIATION MEANING

1 FEM Fixed Effect Model

2 GLS Generalized Least Square

3 OLS Ordinary Least Square

4 REM Random Effect Model

5 GPR Geopolitical Risk

7 EPU Economy Policy Uncertainty

LIST OF FIRGURES

Figure

Figure Name Page

Scatter Plot of the relationship between

geopolitical risk and Stock market price

+1 movement 21 4.2.a Figure Stock Price Volatility 23

4.2.b Figure Political Volatility 23

LIST OF TABLES

Table Table Name Page 3.1 Summary of research variables 18 4.1 Descriptive statistics of the variables 21

Correlation matrix for dependent and 4.2 independent variables 22

4.3 Table OLS regression result 24 4.4 Multi-collinear phenomena Test 24 4.5 Autocorrelation Test 25

4.6 Descriptive statistics of the variables 2 26

Correlation matrix for dependent and 4.7 independent variables 2 27

4.8 OLS regression result 2 27 4.9 Multi-collinear phenomena Test 2 28 4.10 Autocorrelation Test 2 28

4.11 Hausman Test 29

4.12 Fixed-effects Regression 29

4.13 FGLS Regression 30

4.14 Descriptive statistics of the variables 3 30

Correlation matrix for dependent and

4.15 independent variables 3 31

4.16 OLS regression 3 31

4.17 Multi-collinear phenomena Test 3 32 4.18 Autocorrelation Test 3 33

ABSTRACT This study investigates the relationship between geopolitical risk (GPR) and stock

market volatility from a global perspective The study analyzes a panel data set of stockmarket of 10 countries for the period 2010- 2023 What motivated me to undertake thisresearch is the importance of acessing both the volatility and return of geopolitical risks

to the economy, especially the stock market The purpose is to provide more usefulinsights to investors before making investment decisions in order to limit risks and

achieve the best return Therefore, the study used linear regression models to find out

the impact of geopolitical risk on the stock market The estimation method is based onpooled OLS regression with robust standard errors, fixed effects and random effectsmodels The results of the study show that in general, the influence of geopolitical riskhas a negative effect on stock market volatility Compared on two groups of developedcountries and emerging countries, there is a relative difference As for emergingmarkets, it is still negatively impacted by geopolitical risks However, for developedcountries, the effect of geopolitical uncertainties on stock market volatility is not clear Ialso find that considering global economic factors in predictability analysis is crucial forstrong results Finally, this study will provide some benefit on exploiting the impact ofGPR in predictive modeling of stock market volatility while highlighting some of the

useful effects of these recommendations.

CHAPTER 1: INTRODUCTION

1.1 The rational of research topic

Geopolitical tension is increasingly recognised as a serious, worldwide concern.According to statistics from the Global Terrorism Index, Asian countries are facing asignificant increase in terrorist attacks in recent times In 2002, the region was affected

by only 106 terrorist attacks, but then increased by 720%, reaching a threshold of 870

attacks in 2016 (Le & Tran, 2021) The financial world is complex and ever-changing, with numerous factors influencing stock market performance In the post-financial crisis

context, strengthening the stability of the stock market has important implications forthe economy and finance of each country or the whole world Recently, geopolitics has

also been thought of as a factor that can have a significant impact on the stock market.

The more geopolitical instability occurs, the more volatile the stock market Stock price

declines and investment risk increases Research by CFRA shows that the impact of

geopolitical events on the US stock market is relatively transient, but not withoutimpact The company analyzed 24 events since World War II and found that the S&P 500index fell an average of 5.5% from peak to trough in the aftermath of those events

Geopolitical events frequently affect the stock market because they can influence market

sentiment, disrupt global supply chains, and impact the flow of investment capital.Researchers have argued that the effect of geopolitical risks on investment decisions andthus the performance of underlying financial assets would be particularly severe incountries where geopolitical tensions are relatively stronger and more persistent

According to a 2017 Gallup survey, 75% of participating investors expressed concern

about the impact of global political and military conflicts on economic activities,reducing stock returns securities and redirect capital outflows from developingcountries to more developed countries Understanding geopolitics’ impact on the stockmarket is critical for investors who want to make informed decisions and navigate thechallenges posed by geopolitical events

Recent evidence suggests the impact of geopolitical risks on stock market pricesand returns Regarding market price, Given the growing importance of geopolitical riskglobally, a number of prominent domestic and international studies have focused on theimpact of geopolitical risk on stock prices, typically “Balcilar et al events, 2018”, theimpact of geopolitical risks can vary on the economic nature of each region Regarding

market returns, there have been numerous studies in the past that have looked at the

impact of political uncertainty on stock prices and its volatility They showed severe

fluctuations in excess returns due to an increase or decrease in political risk, whichindicates the crucial role of such risks as a pricing factor in a cross-section of stockreturns They were able to confirm that political uncertainty had a negative impact on

stock price and provided evidence of the existence of priced political risk They found

that there was a negative correlation between such attacks and stock markets Severalstudies have investigated the relationship between stock market and GPR in developedeconomies such as European countries and the US Although advanced economiesdominate the global financial markets, the role of emerging economies in global

economic development is equally important Emerging economies face different global

and regional GPR shocks, with a range of consequences for business cycles and financialmarkets As a result, more and more research is focused on emerging economies andthese studies show the predictive potential of GPR for the stock index in emerging

markets and argue that GPR has a more profound influence on the volatility of the stocks

rather than returns study Besides, there are also many studies on the impact of

geopolitical instability on the stock market in Islamic countries However, few writers

have been drawn on any systematic research into impact of geopolitical risks on stockmarket volatility

In this thesis, I will look at the relationship between geopolitics and the stockmarket Researchs looks at how geopolitical risk has become a challenge across much ofthe global economy and at its impact on financial institutions and their boards In thisstudy, I test the influence of geopolitical risk on the volatility of stock markets in theworld This study was the first to use a sample of stock indices in 11 countriesworldwide

1.2 Ressearch aim

This aim of this study is to analyze the impact of geopolitical uncertainty on stock

market volatility

1.3 Research questions

- Does the geopolitical crisis affect the volatility of financial markets?

- Is the impact of geopolitical risk on stock markets different between developed

and developing countries?

- Does the impact of geopolitical risk on stock markets depend on the levels of

geopolitical risk?

1.4 Research objective and scope

wars, acts of terrorism, and tensions between states affecting the normal and peaceful

course of international relations" This definition encapsulates the direct risk arisingfrom the events listed below and any indirect risk arising from such initial events, forexample, war conflict Dario Caldara and Matteo Iacoviello construct a measure ofadverse geopolitical events and associated risks based on a tally of newspaper articles

covering geopolitical tensions, and examine its evolution and economic effects since

1900 The geopolitical risk (GPR) index spikes around the two world wars, at the

beginning of the Korean War, during the Cuban Missile Crisis, and after 9/11 Highergeopolitical risk foreshadows lower investment, stock prices, and employment Highergeopolitical risk is also associated with higher probability of economic disasters andwith larger downside risks to the global economy

- Stock market volatility: Stock market volatility is a measure of how much the stock

market's overall value fluctuates up and down Beyond the market as a whole, individualstocks can be considered volatile as well More specifically, you can calculate volatility

by looking at how much an asset's price varies from its average price Standarddeviation is the statistical measure commonly used to represent volatility Stock marketvolatility can pick up when external events create uncertainty For example, while themajor stock indexes typically don't move by more than 1% in a single day, those indicesroutinely rose and fell by more than 5% each day during the beginning of the COVID-19pandemic No one knew what was going to happen, and that uncertainty led to frantic

buying and selling Volatility is often associated with fear, which tends to rise during

bear markets, stock market crashes, and other big downward moves However, volatility

doesn't measure direction It's simply a measure of how big the price swings are You

can think of volatility as a measure of short-term uncertainty Historical volatility is ameasure of how volatile an asset was in the past, while implied volatility is a metric thatrepresents how volatile investors expect an asset to be in the future

1.4.2 Research scope

- The research space: The thesis focuses on studying the impact of geopolitical

risks on the stock market of different, typically the following 11 countries: China, United

States, United Kingdom, Brazil, France, India, Italy, Japan, Mexico} Canada, Germany

- The research time: Due to the recent 10 years of geopolitical instability becomingmore and more acute, | chose the time of research as the period from 2010 to 2023.Frequency is monthly

1.5 Overview of data collection and data analysis

- Datacollection: Data collected is secondary data based on reputable sources.

- Data analysis: The data of the thesis is panel data which is the combined data ofmany stock indices of many countries at different time Panel data increased the number

of observations by repeating subjects at multiple study time points The panel data isaffected by errors due to different characteristics of the research subjects over time.Therefore, to analyze the data of the study I use 3 independent approaches that are: OLS,

FEM, REM

1.6 Contribution of research

My research adds several important contributions to existing research

Specifically: First, this study adds empirical evidence that geopolitical risks reduce the

financial stability of world stock markets In addition, we use data from 10 countriesacross the globe, which are highly volatile in terms of geopolitical instability asempirically evidenced at the moment Second, through the interaction variables this

study adds empirical evidence in more accurately reflecting the role of mediating factors

in the relationship between geopolitical risk and stock market volatility securities We

also confirmed the uneven impact of geopolitical risks on stock markets in different

countries around the world as well as in the same region Therefore, empirical evidencewill be useful to investors in formulating appropriate investment policies and decisions,

helping the economy to overcome periods of geographical and political instability to improve economic performance financial stability in the long run.

1.7 Structure of the study

Chapter 1: IntroductionChapter 2: Literature ReviewChapter 3: Research MethodologyChapter 4: Result and Diccusion

CHAPTER 2: LITERATURE REVIEW

2.1 Impact of geopolitical risks on stock market

Previous studies provide evidence that geopolitical uncertainties tend to affect

stock returns and volatility (Balcilar et al., 2016; Rawat & Arif, 2018; Balcilar et al.,

2016) events, 2018; Ucler & Ozsahin, 2020; Sekmen 2020) However, these effects arenot uniform across countries (Rawat & Arif, 2018; Das et al., 2019) and are structurallyasymmetric (Kannadhasan & Das, 2019)

Many studies show the negative impact of terrorist activities on stock returns andthese effects are mainly evident in traditional financial markets and developingcountries (Abadie A & Gardeazabal J., 2003; Blomberg et al., 2009; Orbaneja JRV et al.,2009) However, these studies only focus on terrorism instead of other geopolitical risks,such as policy and war risks, which contribute significantly to financial market volatility

Moreover these studies focus only on developed countries and ignores emerging

economies Balcilar et al (2016), a study related to the impact of geopolitical risk,

examined the impact of terrorist attacks on profitability and stock market volatility in

the G7 countries It has been established that terrorist attacks have a significant effect onstock market returns and these attacks have an effect on stock market volatility in Japanand the United Kingdom Balcilar et al (2018) analyzed the impact of geopolitical risk

on stock returns and volatility using non-parametric causal quantum tests for BRICS

countries and found that the impact of the geopolitical risk to stock market volatilityoutweighs the impact on stock market returns In addition, they find that geopoliticalrisk has a non-linear and asymmetric effect on market returns in different emergingeconomies but has a consistent effect on volatility of the market

GPR can effect stock market volatility in several ways First, as a from ofincertainty, the rise of GPR can delay the decision-making process of market participant(Salisu et al, 2022), such as investors delaying consumption and firms delayinginvestment (Bloom, 2009) Second, the rise of GPR can reduce global trade andinvestment, and globalized layouts may shift to regionalization (Eckstein and Tsidon,2004), thus pushing up costs for firms Rawat and Arif (2018), in their quantumregression analysis for the BRIC countries for the period 1985-2017, argue that theBrazilian and Russian stock markets are more sensitive and more reactive to geo-shockspolitically, India and China are more resilient to these shocks Hence, they claim thatIndia and China can be safe havens for investors Ucler and Ozsahin (2020) reiterated

the impact of GPR on stock market returns with the Konya panel (2006) causality test

using data from nine developing countries over the period section 2018:M08 They found that there is a one-way causality from geopolitical risk to stockmarket indices in Argentina, Brazil, Mexico and Thailand Sekmen (2020) analyzed the

1987:M12-impact of geopolitical risk on stock markets in 14 developing countries using

time-varying causal analysis for the period 1998:M01-2019:M09, and determined that stockexchange returns and volatility were driven by geopolitical risk in times of increasedgeopolitical risk

Research into the impact of terrorist attacks on financial markets has madesignificant progress in recent years One approach that stands out in this series ofstudies is the fact-finding approach Based on an event research approach, Karolyi andMartell (2005) find that the impact of terrorist attacks on the stock market is greaterwhen such attacks attack firms in different countries rich and democratic, and

kidnapping corporate executives leads to greater negative stock returns than bombing

facilities or buildings Chen and Siém (2004) use event research to show that USfinancial markets recover more quickly from disruptions caused by terrorist attacksthan financial markets in some countries other They also note that US financial marketshave become more resilient in recent decades to terrorist attacks and attribute thisfinding to the banking industry's steady supply of liquidity/ finance As part of a series ofevent research analyzes to find differences in responses to terrorist attacks in themarketplace is reported by Kollias et al (2011) They studied the impact on generalstock market indexes and on stock market sectors of the attacks that took place on 11March 2004 in Madrid and 7 July 2005 in London As for the general stock indexes, theyfound that the London market recovered much faster than the Madrid market They alsofound that returns on terrorist attacks were significantly negative for most sectors inboth markets and the overall impact of terrorist attacks on profits Stock market returnsand volatility are transient for an analysis based on individual investors’ forecastsshowing the expected temporary effects of the 9/11 terrorist attacks (Glaser & Weber.,2005) Based on a comparative analysis of the London and Athens stock markets usingevent research methods and the GARCH model, it is clear that the size and maturity of

the market as well as the specific attributes of the attacks Terrorist disclosures help

explain the differential response of stock markets to terrorist attacks (Kollias et al.,2016) The volatility of stock market indices increased at the beginning of the Iraq warand then began to decline The trend of stock market volatility in developing countries(especially in Egypt) shows a different pattern Differences in response to terrorist

attacks in returns and volatility in stock returns between the markets of developed anddeveloping economies - in particular Middle East and North Africa (Nikken et al., 2008).

After the GPR index was proposed, more and more academic researchers areinterested in the relationship between GPR and the stock market Some studies showthat GPR can affect the volatility of stocks in a certain industry, such as global defensecompanies (E Apergis & N Apergis., 2016), companies global tourism and leisure (S.Demiralay & E Kilincarslan., 2019) and rare metal companies (M.-J Zhou et al., 2020).Salisuet et al (2022) used the GARCH-MIDAS method to predict the volatility of stockreturns in 23 emerging economies with geopolitical risk The results show that the stockmarkets of these emerging economies have experienced strong fluctuations under theinfluence of high geopolitical risks

2.2 Impact of macroeconomic factors on stock market

There is a great deal of literature in the financial field that investigates the

determinants and effects of stock market performance Gertler and Grinols (1982)

investigated the relationship between unemployment, inflation and common stockreturns The results show that there is a statistical correlation between expected stockreturn and macroeconomic variables With regard to unemployment and inflation, theexplanatory power of the regression analysis was greatly enhanced Flannery and James(1984) investigated the effect of interest rates in the United States They conclude

empirical evidence that there is a significant relationship between the sensitivity of

stock returns and changes in interest rates Fang and Miller (2002) studied the impact ofdaily currency devaluations on stock market returns for five emerging East Asian stockmarkets The results show that the conditional variance of stock market returns and therate of decline exhibit time-varying characteristics for all markets Joseph (2002)studied the impact of exchange rates and interest rate changes on UK corporations in thechemical, electrical, engineering and pharmaceutical industries The results show thatindustry returns are more negatively affected by changes in interest rates than changes

in exchange rates Tchereni & Mpini (2020) investigated the impact of monetary policy

decisions on stock markets in emerging economies in South Africa and concluded that

5.2 % of stock market volatility is due to monetary policy and there is a negative

relationship between stock market volatility and M2.

Based on the literature review, current studies generally show the impact ofEconomic Policy Uncertainty (EPU) on the stock market (Baker et al., 2016; Asteriou &Sarantidis, 2016; Hardouvelis et al., 2018) and the impact of Geopolitical Risks (GPR) on

the stock market (Balcilar et al., 2016; Balcilar et al., 2018; Ucler and Ozsahin, 2020;Sekmen, 2020 ), while a small number of studies examine these two factors together(Enamul Hoque et al., 2019; Kannadhasan & Das, 2019) It is noteworthy that no studies

on the relationship between the EPU and the Stock Exchange have been conducted for

Turkey, as the current and ongoing EPU index is not calculated for Turkey In this study,the EPU index from Enamul Hoque et al (2019) with uncertainty data calculatedseparately for countries within the scope of the World Uncertainty Index (WUI) Inaddition to WUI, the Geopolitical Risk Index (GPRI) is also included in the analyses.Therefore, this study will fill the gap in the literature Finally, it was found that most ofthe studies were conducted for the entire literature, so it is assumed that generatingcountry-specific results for the countries in this study would add a specific depth to thetopic in the document

One of the studies done on this topic is Sum (2012) which examined the impact of

economic and political uncertainty (EPU) in the United States on stock marketperformance in other countries Asia for the period 1985:M02-2012:M02 In this study,

it was determined that high EPU reduces stock market returns in 5 ASEAN countries andthere is a causal relationship between EPU and stock market returns in Singapore andMalaysia Liu and Zhang (2015) found a similar effect for the US S&P 500 for the period1996:M01-2013:M01 Asteriou and Sarantidis (2016), in their analysis using data from

18 OECD countries for the period 1993-2013, found that political instability negativelyaffects stock market returns and impacts This move is larger for banking stocks Baker

et al (2016) determined that a high EPU increases price volatility in the US stock marketbetween 1985: MO1 and 2014: M12 Li and associates (2019) find similar results forChina and the G7 countries Alqahtani and Martinez (2020) also examine the impact ofeconomic policy uncertainty in the US on the stock markets of the Gulf cooperativecountries and determine that these uncertainties have an impact long-term negative toshare prices in Bahrain and Kuwait

Kannadhasan and Das (2019) analyzed the impact of economic policy uncertainty(EPU) and geopolitical risk (GPR) on stock markets in developing Asian countries using

the methodology quantum regression for the period 1997-2018 and found that the

effect of EPU is negative in all quanta On the other hand, they found that the effect ofGPR was negative in the lower quartiles and positive in the middle and upper quartiles.The researchers, who determined that the negative effect of EPU is stronger than thenegative effect caused by GPR, also stated that the relationship between both variables

and stock returns is asymmetric Das et al (2019), referring to topics in the framework ofEPU, GPR, and fiscal pressures, argue that the impact of US-centered macroeconomic

shocks in developing countries in The period 1997-2018 is heterogeneous in terms of

the causal relationship between developing countries and the impact of the EPU which ismore important and significant than the other two shock indices

On the other hand, Enamul Hoque et al (2019) analyzed the impact of globaleconomic policy uncertainty (WUI) and geopolitical risk (GPR) on stock prices usingMalaysia 2009-2017 data, using Malaysia data using the SVAR method In their findings,

they conclude that geopolitical risk has no significant impact on the stock market and

that the EPU has a negative and statistically significant effect on the stock market.Similarly, Karacaer et al (2019) analyzed data from 21 countries for the period 2005:M03-2019: M03 and revealed that there is no causal relationship between EPU and stock

market returns in most developed markets develop Addressing GPR stock returns and

yield volatility in the travel industry, Hasan et al (2020) determine that GPR has a

statistically significant effect on these variables under normal market conditions in 13

developing countries, however they find that this effect disappears under normalmarket conditions unusual market On the other hand, Enamul Hoque and Zaidi (2020)

reveal that the impact of global risk and country-specific geopolitical risk on stock

market returns in the countries identified as the quintile Fragile percentiles can beobserved in the nonlinear Markov transform, but not observable determined by thelinear method

CHAPTER 3: RESEARCH METHODOLOGY 3.1 Research process

The research process includes the following steps:

- Step 1: Identify the research problem

A clearly and properly defined research problem is a prerequisite for the success ofthe research project This is also the first stage of the research process identified frommany different sources, in the article mainly from 2 main sources: theory and market

Identify the research problem, choose the topic: "The effect of geopolitical risk on

stock market volatility"

- Step 2: Determine the research objective

After identifying the research problem, the author clearly defines what to study andthat is the research objective, including general research objectives and specific researchobjectives Give a specific objective in the form of a question, and that is a research

question.

- Step 3: Design or plan the study

Summarize the background theory used and previous studies to build a research

model, thereby providing a research model and research hypothesis for the research

question posed Author appropriate research methods, standardize, collect necessarydata and quantitative data to properly assess the status and relationship of macrofactors to stock price fluctuations in the world

- Step 4: Measure, collect data

Consult with previous researchers about finding data from trusted and focusedsources Design statistical forms on stock price indexes on the market, political riskindexes and macro factors affecting stock price movements

- Step 5: Analyze the data

Use quantitative methods to analyze data First, analyze the relationship, then apply aquantitative model to assess the impact of geopolitical risks and external factors on

variables stock price movements, statistical testing of the reliability of analysis results,

running linear regression models, etc

- Step 6: Explain and clarify the data

Interpret research results and find out what causes stock price fluctuations

- Step 7: Write a report on results solutions and recommendations

Report on research results, present viewpoints, policy orientations and make

appropriate recommendations based on obtained research results.

3.2 Data collection

3.2.1 Geopolitical risk

Geopolitical Risk (GPR) is measured by Geopolitical risk index - monthly indicator

calculated based on a tally of newspaper articles covering geopolitical tensions This

research adopts the geopolitical risk index (GPR) developed by Caldara and Iacoviello(2018), which precisely records the timing and intensity of increased geopolitical risk.The GPR rises indicate well-known historical events, such as military interventions,terrorist attacks and periods of tension between countries The indexing measurement

is based on the methodology presented by Saiz and Simonsohn (2013) and Baker et al.

(2016) It is constructed using an algorithm that calculates the frequency of articlesrelated to geopolitical risks in leading international newspapers published in the UnitedStates, the United Kingdom and Canada (Caldara and Iacoviello 2018) Additionally, GPR

provides the most accurate assessment of the impact of geopolitical risks on equity

markets

All GPR data are collected from https://www.matteoiacoviello.com/gpr.htm , which

is the official website that aggregates GPR data for countries around the world compiled

by Caldara and Matteo Iacoviello built

3.2.2 Stock volatility

Daily stock market indices are obtained from the website Investing.com: :https://vn.investing.com/markets

Volatility in the stock is mearsured by the standard deviation of the log data of each

country’s stock market index Following Zang et al (2022), to mearsure the monthlyvolatility of stock performance for the selected countries I calculate the sum of dailysquared returns Specficially, the RV can be calculated as, where represents the number

of trading day in the t-th month for the i th country, is the j-th daily return on the ï thcountry in the £-th month

3.2.3 Other data

Other macro factors affecting the stock market used as control variables are:Inflation Index (IFL), economic policy uncertainty index (EPU) and Exchange rate (EXC).All are collected from reputable websites

EPU index: http://www.policyuncertainty.com/index.htmlInflation Index: https://www.inflation.eu/en/

The sample of the data includes monthly frequency data for the period from April

2010 to April 2023

We choose 10 countries (Canada, France, Germany, Italy, Japan, US, UK, Mexico,

Brazil, China, India) to research on this studies based on the availability of data Table3.1 Summeries information for research data

Table 3.1 Summary of research variables

Variables Definition Symbol

Dependent Variable

Volatility Market price of Dispersion of the returns of a stock or VOL

share market index

Independent Variables

Geopolitical Risk The risk associated with wars, terrorist GPR

acts, and tenstions between states thataffect the normal and peaceful course ofinternational relations

Control Varibles

Inflation The rate of increase in prices overagiven VOL

period of timeEconomy Policy Uncertainty A class of economic risk where the future EPU

path of government policy

Exchange Rate The rate at which one country’s curency EXC

can be traded for Dollar

3.3 Research method

The OLS linear regression method is widely used in econometrics The advantage is

that this method is not too complicated but effective To estimate the regression model, Iused the OLS method of least squares proposed by the German mathematician CarlFriedrich Gauss The regression model is:

VOL = f(GPR, IFL, EPU, EXC)

In general, the research model is written as follows:

VOL = By + BịGPR + B;IFL + B3EPU + B„EXC + Ut (U Random error)

Where:

“+ VOL: Stock volatility

Stock market volatility is calculated based on the rate of return (rị) on each country's

stock index date The index returns are calculated as follows:

rạ=log (P./P 1)

Where Yr; is the natural logarithm of the index's daily rate of return at time t P, is the

closing price at time t, P,.; is the closing price at time t-1, respectively.

“* GPR: Geopolitical riskGeopolitical Risk as measured by GPR index researched and developed by Caldaraand Lacoviello (2018)

“* EPU: Economic Policy UncertaintyEconomic policy uncertainty has its orgin in the uncertainty of inflation, negativeeconomic growth, financial crisis, extraodinary loan cuts, pandemic, an increase in theunemployment rate, foreign exchange fluctuations and unexpected changes in monetarypolicy EPU can manifest as unexpected changes in monetary policy, fiscal policy, andregulatory policy, and it mainly stems from whether current policies will change in thefuture Economic policy uncertainty describes the unknown effects of new policies onthe economy and the private sector The economic uncertainty index in my research iscollected from the World Uncertainty Index developed by Ahir et al

s* EXC: Exchange Rate

Exchange rate is a rate at which one country’s currency will be exchangede for

Dollar and affects trade and the movement of money between countries The exchange

rate in this study is collected from FRED Economic Data - database produced by theResearch Department of the Federal Reserve Bank of St Louis maintain

Regression results will be obtained using the statistical software STATA 14 Severaldiagnostic tests such as normality tests, correlation statistics and variable variance will

be used to determine the degree of polymorphism collinearity between the variables.

The first method used in the study is the least squares regression method

The Gaus-Markov intention states the properties of OLS With the assumptions of theclassical linear regression model, the OLS estimators are linear, unbiased, minimum

variance estimates After regressing the model by OLS method, I perform the steps of

testing the defects in the model:

— Multicollinearity test: multicollinearity is a defect of the model that makes the

independent variables have a linear relationship with each other This phenomenon

violated the assumption of the regression model leading to the standard error of thecoefficients being large, the confidence interval large and the t-statistic less significant,

and the estimates not very accurate It is therefore easy to arrive at an unwarranted rejection of the null hypothesis, which may not be true.

— Autocorrelation test: Autocorrelation is the phenomenon that error at time t-1 or

at any time in the past If the model has autocorrelation, the OLS estimate remains

unbiased and consistent However, these estimates will no longer be efficient estimates

To detect autocorrelation appearing in the model, I use the Breusch Godfrey test whichcan control high order autocorrelation Based on the variance magnification factor VIF,

we can detect this phenomenon

— When analyzing regression models, I use robust standard error: Still using

estimation coefficients from the OLS method, but the variance of estimation coefficients

is recalculated without using the constant error variance hypothesis - Robust Statement.

Estimating a strong standard error model will give a true estimate of a normal error that

accepts the presence of heteroskedasticity.

The second and commonly used estimation method in panel data analysis is thefixed-effects model (FEM) and the random-effects model (REM) The fixed group effectsmodel examines group differences in intercepts, assuming the same slopes and constant

variance between subjects Since the (country-specific) group effect is time-invariant

and considered part of the intercept, the error term (e) is allowed to correlate withother explanatory variables In contrast, a random effects model estimates thecomponents of variance for groups (or time) and error, assuming the same interceptsand slopes In addition, the error term was not correlated with any other explanatory

variables in the study The Hausman specification test was used to compare the fixed

effects and random effects models If the null hypothesis that individual effects do notcorrelate with other inhibitors in the model is not rejected, the randomized model isbetter than its fixed counterpart (Park., 2009) The Hausman specification testcompares FEM and REM, testing the assumption that the estimates of FEM and REM arenot systematically different (Al-Malkawi & Abdullah., 2011) If the null hypothesis isrejected, then the RE estimator is more suitable, otherwise the FE tool (Verbeek., 2000;Greene., 2003)

CHAPTER 4: RESULT AND DICUSSION

4.1 The general impact of geopolitical risk on stock markets

4.1.1 Description statistics

The study's observational sample includes 1716 observations from 10 countries for

which data are available for the years 2010-2023 The mean, standard deviation,

minimum and maximum values of the independent variables studied are reported inTable 4.1, and Figure 4.1 is a scatter plot that intially predicts the relationship betweenGPR and VOL

Mean Std Dev Min Max

6 œ

Source: author calculated from Stata 14.0

Figure 4.1 Scatter Plot of the relationship between geopolitical risk and Stock

N

© ¬

So o

If we only draw conclusions about the value of data using tables, the conclusions areoften not comprehensive So I use a scatter chart to observe and show the relationship

between geopolitical risk and stock market volatility The dots in the histogram not only show the value of the data, but also show the trend when we visualize the entire data set

as a whole The vertical axis represents the value of stock market volatility relative toany value of geopolitical risk on the horizontal axis Through the scatter plot in Figure4.1, we can easily visualize the relationship between geopolitical risk and stock marketvolatility This is an inverse relationship, as geopolitical risk increases, stock market

volatility decreases The spread of densely dispersed points, centered around a straight

line, indicates the strong impact of geopolitical risk on market volatility

Table 4.2 shows the correlation coefficient between the variables, the purpose is tocheck the close correlation between the independent variables and the dependent

variable to remove the factors that can lead to multicollinearity before running the

regression model The correlation coefficient between the independent variables in the

model has no pair greater than 0.8 and the coefficients are very small, so the possibility

of multicollinearity when using the regression model is very rare as impossible

Table 4.2 Correlation matrix for dependent and independent variables