Geopolitical Risk and Stock Returns: Evidence from an Emerging Market

Key findings from this study

• The study found that geopolitical risk exerts a statistically significant negative effect on stock returns in Vietnam's equity market.
• The researchers demonstrate that firms with higher geopolitical risk sensitivity command elevated expected returns, consistent with compensation for bearing additional risk.
• The authors report that pooled ordinary least squares estimation corroborates the stability of the negative relationship documented in the fixed effects specification.

Overview

This study investigates the relationship between geopolitical risk and stock returns in Vietnam's emerging market economy. The research examines all listed companies using monthly observations spanning January 2010 through December 2023. A panel fixed effects model serves as the primary specification, controlling for firm-level heterogeneity. The findings establish a statistically significant negative association between geopolitical risk and equity returns.

Methods and approach

The authors employ a panel fixed effects model as the primary specification to isolate the effect of geopolitical risk while accounting for unobserved firm characteristics. Monthly data encompass all Vietnamese listed companies across the 14-year observation period. Geopolitical risk exposure is operationalized through firm-level sensitivity measures (GPR β). Pooled ordinary least squares models provide robustness verification of the core results.

Results

Geopolitical risk depresses stock returns across the sample of Vietnamese firms. Firms exhibiting greater sensitivity to geopolitical risk demonstrate higher expected returns, consistent with standard risk-return compensation frameworks. The negative relationship between geopolitical uncertainty and market performance reflects diminished investor confidence during periods of elevated geopolitical tension. Robustness checks using alternative estimation techniques confirm the stability and consistency of the documented effects.

Implications

The documented negative impact of geopolitical risk on emerging market equity returns has direct relevance for portfolio construction and risk management in developing economies. Institutional investors and asset managers operating in or allocating capital to Vietnam should incorporate explicit geopolitical risk measures into valuation models and position sizing frameworks. The finding that geopolitical risk-sensitive firms command higher expected returns suggests differential pricing mechanisms for exposure to global shocks across the cross-section of equities.

The results underscore the transmission mechanisms through which global geopolitical events propagate into local financial markets. Vietnam's exposure to international supply chains and capital flows renders domestic equity valuations sensitive to geopolitical developments originating outside national borders. Risk assessment protocols and investment strategies must integrate geopolitical indicators alongside traditional macroeconomic and firm-specific variables. The emerging market context reveals how peripheral economies experience heightened vulnerability to geopolitical shocks relative to developed markets.

Future research might investigate whether the observed risk-return relationship varies across sectors, firm sizes, or specific types of geopolitical events. Temporal dynamics warrant examination to determine whether geopolitical risk effects persist or dissipate as market participants adjust expectations. The heterogeneity in firm-level sensitivities suggests scope for disaggregated analysis examining which characteristics drive differential exposure to geopolitical uncertainty.

Scope and limitations

This summary is based on the study abstract and available metadata. It does not include a full analysis of the complete paper, supplementary materials, or underlying datasets unless explicitly stated. Findings should be interpreted in the context of the original publication.