Volatility transmission and spillover dynamics across financial markets: the role of geopolitical risk

Abstract This paper examines the effect of geopolitical risk (GPR) on return and volatility dynamics in Middle East and North African (MENA) countries by using an ADCC-GARCH model and a spillover approach. Unlike previous studies, we include the GPR index to capture risk associated with wars, terrorist acts, and political tensions. Moreover, we test for both static and dynamic analysis using a rolling window. In brief, the findings highlight that GPR does not contribute to the return spillovers among MENA financial markets. However, the dynamic analysis provides evidence of the high level of responsiveness of the total spillover index to major political events (e.g., the Arab Spring uprising and political tension between Qatar and other Gulf Cooperation Council countries). More interestingly, Qatar, Kingdom of Saudi Arabia, and the United Arab Emirates are identified as the main transmitters of return spillovers to the rest of the MENA markets. Overall, our results are essential in understanding the impact of the GPR on return spillover among MENA countries, and are of particular importance to policymakers, market regulators, portfolio managers and investors.