Navigating turbulence: How do geopolitical risks and oil price shocks shape global equity markets? A GVAR approach

Stability in the global equity market relies on the existence of a favorable macroeconomic environment. This study examines the dynamic responses of these markets to geopolitical risks and oil price shocks from 1979Q2 to 2023Q3 using the global vector autoregressive (GVAR) approach. We introduce new variables for geopolitical risks (“threats” and “acts”) and oil price shocks (“demand,” “supply,” and “risk”). Our findings indicate that a positive shock of 1 percent to geopolitical risks and oil price demand and risk leads to significant declines in equity markets, with varying impacts across quarters. Responses are notably stronger to geopolitical “acts” than to “threats.” The equity markets in the Euro region are more vulnerable to geopolitical risks, whereas Asian markets are more affected by oil price shocks. In contrast, the US equity market is the most resilient to these external influences, which leads to important policy implications for market stakeholders.