On the relationship between geopolitical risks and euro area sovereign bond yields

This paper is the first to investigate the relationship between euro area sovereign bond yields and geopolitical risks. The sample period extends from January 2016 to October 2024 and includes all major recent geopolitical events. Using standard linear regression models, the results indicate that geopolitical risks are strongly positively associated with sovereign bond yields, even after controlling for economic factors that determine bond yields. This finding is consistent with the view that markets anticipate an extra risk premium to compensate bond holders for increased geopolitical risks. • Examines linkages between euro area sovereign bond yields and geopolitical risks. • Geopolitical risks are strongly positively associated with sovereign bond yields. • An extra risk premium is required to compensate bond investors. • Geopolitical risks should be embedded in risk management models.