Geopolitical Risk and Stock Returns

This paper systematically examines the relationship between geopolitical risk and stock returns by constructing a comprehensive Geopolitical Risk Index (GRI) using Wall Street Journal articles from 1984 to 2025. GRI positively predicts excess market returns in the US and globally, in and out of sample, beyond other leading risk factors. The effects of geopolitical risk have intensified since 2000. The GRI captures trade wars, a previously overlooked dimension. The trade war component adds incremental predictive power. Cross-sectionally, stocks with higher geopolitical risk exposure earn higher abnormal returns. Overall, our findings underscore the importance of geopolitical risk in asset pricing.