Geopolitical risk and defense-sector stocks: A wavelet coherence analysis

We examine the comovement between daily geopolitical risk (GPR) and Korean defense-sector stock dynamics (returns and volatility) across multiple horizons using wavelet coherence. Comovement intensifies during major geopolitical episodes and is concentrated at medium and long horizons, particularly for volatility. The linkage is stronger for general defense firms, including suppliers and subsystem producers, than for major defense firms that produce complete defense systems. Geopolitical acts exhibit stronger and more persistent coherence than geopolitical threats. These patterns remain robust after conditioning on macro-financial factors. The GPR – defense stock relationship is nonlinear and primarily reflects time-varying volatility dynamics rather than stable directional return responses. These findings suggest that greater attention should be paid to horizon-dependent and nonlinear GPR sensitivity in defense stocks when assessing risk, allocating capital, and designing risk-management strategies.