Geopolitical Risk And Financial Market Volatility ——The Example Of Six Emerging Market Countries

The international situation is complex and volatile,with anti-globalization ideas spreading,new populism rising and geopolitical events occurring frequently.Geopolitical risk has attracted more and more scholars’ attention and research,and the impact of geopolitics on a country’s financial market has been supported by many empirical studies.As economies and financial markets around the world are closely linked,the impact of geopolitical risks on financial markets will be transmitted to countries around the world through trade and financial links,which may lead to global systemic financial crises.With the continuous improvement of market economic system,emerging market countries with high economic development speed have won the favor of international investors because of their huge development potential.Therefore,the geopolitical risk of emerging market countries is particularly concerned by international investors.Once the geopolitical risk of a country rises,international investors will react in the first time and withdraw their capital,thus causing a shock to the financial market.In this paper,by using GARCH-MIDAS model for geopolitical risk in six emerging market economic entities,which are Brazil,India,Indonesia,South Africa,Turkey and Mexico,to study financial market volatility.The relationship between and the geopolitical risk impact of short-term financial market transmission channels are discussed in this paper,and forecast financial market volatility in an economic entity by geopolitical risk,it provides theoretical basis and empirical test basis for the probability of reducing financial market volatility by managing geopolitical risk transmission channel factors.We find that incorporating geopolitical risk factors into Taylor rule-based fundamental volatility models significantly improves the predictive power of standard macroeconomic fundamentals（output growth,inflation,and monetary policy interest rates）for financial market volatility.On the other hand,in the short run,securities capital flows（equity flows and debt flows）and market sentiment are important transmission channels of geopolitical risks that cause violent fluctuations in financial markets.China is at a critical stage of internationalization of financial market and RMB.The capital market is gradually liberalized,the floating range of exchange rate is gradually enlarged,and the exchange rate system is becoming more and more flexible.At the same time,China is also facing a complex international and domestic and external environment,such as the deterioration of China-Us relations and the impact of COVID-19.In this context,the fluctuation of China’s exchange rate and stock market will be greatly affected,and the close connection between stock market,foreign exchange and financial market means that the stability of China’s financial market will be severely impacted.Financial stability is an important basis for a country’s financial security and stable economic operation,and an important issue that needs to be considered in the process of RMB internationalization in China.Through the study of the relationship between geopolitical risks and financial market volatility in emerging market economic entities,setting up a reasonable model for emerging market countries to forecast financial market volatility,including stock markets and currency markets,helps us learn from their experience and seek some advice,correctly grasp the direction of the development of financial market,be aware ahead of financial market volatility,and implement corresponding policy to stabilize the exchange rate of RMB and stock price volatility.Securities capital flows and market sentiment as important transmission channels of geopolitical risks influencing financial market.When geopolitical risks event occurs,China can manage the securities capital flows through proper management measures,actively guide market sentiment,boost investor confidence to the market,and alleviate the impact of geopolitical risk to financial market through these measures,which guarantees stable operation of the financial market in China.It has important reference significance for China to prevent financial market risks,maintain financial market security,promote the sound development of Chinese financial market and the internationalization of the financial market.