Geopolitical risk and financial stress

• Geopolitical risk significantly influences financial stress over time. • Credit, equity, and volatility rise with financial stress, but impact weakens at extremes. • Safe assets respond most to stress; funding shows a negative correlation during crises. • Structural breaks in financial markets are accounted for in the analysis. This paper explores the relationship between geopolitical risk and financial stress. We use a quantile regression to investigate the impact of geopolitical risk on financial stress levels, along with its constituent elements, such as credit, equity, volatility, funding and safe assets. The dataset comprises observations collected on a daily basis between January 3, 2000, and November 8, 2024. The time span permits the exploitation of the relationship, with the effect of a structural break in the time series being controlled for. In light of the identified structural break in the financial market, the results indicate that an increase in geopolitical risk exerts a notable influence on financial stress. Furthermore, the findings suggest a positive relationship among all financial components. As the severity of financial stress escalates, the impact concomitantly increases. Notably, the safe assets component of the financial stress index demonstrates the greatest responsiveness to elevated stress levels. The findings are corroborated for all geographical areas examined, except for those situated within emerging markets, which appear to demonstrate a reduced sensitivity to geopolitical risk.