When Bad News is Good News: Geopolitical Risk and the Cross-Section of Emerging Market Stock Returns

By Adam Zaremba, Nusret Cakici, Ender Demir. Social Science Research Network, 2020

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Using a news-based gauge of geopolitical risk, we study its role for 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.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/39b34368107f3433e2164ce2a2edaaa3fb255159