Beggar-Thy-Neighbor: How Political Relations Shape Cross-Border Stock Market Risk Spillovers

Amid escalating geoeconomic fragmentation, this study investigates how bilateral political relations structurally shape cross-border systemic risk spillovers. Employing a rigorous two-step empirical framework, we utilize a High-Dimensional Time-Varying Parameter Vector Autoregression (HD-TVP-VAR) model to map the dynamic risk topology of 20 major economies (1995–2025), and subsequently construct a comprehensive panel dataset (1995–2024) for econometric validation. We empirically find evidence consistent with a “beggar-thy-neighbor” contagion dynamic: closer political alignment paradoxically exhibits a strong association with amplified mutual risk spillovers. Graphical analysis reveals a radical architectural shift from unipolar contagion to bipolar and unidirectional punitive regimes. Furthermore, we identify three primary mediating conduits that facilitate this political contagion: bilateral global value chain (GVC) integration, macro-financial cycle synchronization, and cross-border portfolio allocation. We also document profound structural asymmetries, with advanced economies dictating tail risk transmission while emerging markets disproportionately absorb external shocks. Nevertheless, robust domestic institutional quality serves as a critical systemic buffer. Finally, threshold regressions suggest that the “beggar-thy-neighbor” isolation effect is strictly non-linear, drastically truncating mutual risk spillovers only when geopolitical tensions become acute. These findings urge policymakers to internalize geopolitical vulnerabilities within macroprudential frameworks.