Geopolitical risks: a significant challenge for the global financial stability

This brief summarizes the major findings of NguyenHuu & Örsal (2023) on the significant impacts of geopolitical risks (GPRs) on global financial stability. In emerging economies, when financial stress (FS) is already at or above average, GPRs significantly amplify this instability; nevertheless, when financial conditions are stable, GPRs do not exert significant impacts. In these countries, foreign exchange markets, and to a lesser degree, the debt market and banking sector, are more severely impacted by geopolitical tensions than the stock market. The Group of Seven (G7), which represents developed economies, on the other hand, has seen negative effects of GPRs on their stock markets but not on other sectors.