The Impact of Geopolitical Risks and Uncertainties on Equity Financing Costs: Evidence from Türkiye

This study analyses the impact of geopolitical risk (GPR) on the cost of capital in the Turkish banking sector by using autoregressive distributed lag (ARDL), dynamic conditional correlation (DCC), and generalised autoregressive conditional variance (GARCH) models. Using monthly data for the period 2005M01- 2025M03, in the paper, the long and short-term relationships between GPR and equity financing and analyses the dynamic evolution of these rela tionships are examined over time. The ARDL model results demonstrate that GPR has a borderline significant impact on the cost of capital in the long run, while macroeconomic indicators such as the exchange rate and the policy rate have much stronger and statistically significant effects. In particular, the exchange rate is strongly positively correlated with the cost of capital, reflecting the dependence on foreign currency borrowing in the Turkish banking sector. Meanwhile, the policy rate is observed to have a stabilising effect. Short-term forecasts also emphasise the sensitivity of the cost of capital to geopolitical shocks, especially during periods of heightened regional tensions. The DCC-GARCH model confirms that the correlation between the GPR and the cost of capital is positive and increases over time. This tendency is predominantly evident in the post-2018 period, coinciding with increasing regional conflicts and domestic political instability. Moreover, inflation is found to be significantly associated with the cost of capital, while its link with exchange rate volatility reveals the interconnectedness of macroeconomic variables in emerging economies.