The effects of the geopolitical risks on stocks: An assessment from finance, industry and it sectors in Turkey and BRİCS countries

Abstract

At time present time, while risk factors are determinant of the financial markets, they are generally expressed as potential losses in the literature. Geopolitical risk, which is count as one of the risk factors, pay much attention with the increasing chaoses, economic tensions and threats in the world. Before, geopolitical risk is perceived posed by geopolitical location; in today it's including risks also derive from social, political, economic and geographical location. From the view of the recent studies, geopolitical risk is in the top of the five critical risks worldwide and preceded cyber risk. Caldara and Iacoviello have created the geopolitical risk index to make sense of geopolitical risks in 2018. They divided risks into 6 sub-categories such as war, threat, terror and tension. In accordance with their results, higher geopolitical risk causes decreasing on the real activity of the economies and capital movements shifted to developed economies.(Caldara& Iacoviello,2018) Caldara and Iacoviello have raised awareness about geopolitical risks with their work and touched upon the effects of major geopolitical events. Geopolitical risks and the effects of uncertainties arising from these risks awareness will provide insights to investors and policy makers. The leading geopolitical risks announced in 2022 are as follows; covid-19, the power of technology companies, increasing wars and tensions, permanent inflation after covid, disruptions in production and supply problems. Based on these conditions, the scope of this study was determined as finance, technology and industrial companies. In the industry, finance and information technology sectors, the effects of changes in geopolitical risk and changes in stock markets in BRICS and Turkey countries have been examined comparatively. The strategic importance of the BRICS countries, the evidence in the literature that they are among the rapidly developing countries, the first emergence of Covid in China and the countries where the variants are most frequently seen are countries such as Brazil and South Africa, at the same time, BRICS geographical location and consist of the 40% of the world population. These factors have motivated to explore the relationship of geopolitical risk impacts on specific sectors in the BRICS countries. In addition, Turkey was among the 2022 geopolitical risk lists announced by the Times magazines. Toda Yamamoto causality test was used in the analysis of the study. Although the Granger test is the first causality test to enter the literature, Toda Yamamoto, unlike the Granger test, includes the variables in the analysis at their own level. This ensures that information loss is avoided in the long run, and both-sided causality testing can be done thanks to Toda Yamamoto. Therefore, examining the relationship with Toda Yamamoto will be meaningful in this respect. The VAR model was used for the Toda Yamamoto test. Based on the conclusions drawn from the VAR model results, it proceeded with appropriate unit tests such as OLS. According to the results of the study, it was concluded that there is no direct sector-based causality in the BRICS countries. For example, the increase in the geopolitical risk index in the information technology sector in Russia affects the change in information technology share prices. This could be related to the Russia-Ukraine war and the technological constraints imposed on Russia worldwide. While there is no direct causality between the stock markets in the BRICS countries and the geopolitical risk index in the examined sectors, it has been concluded that there is a bilateral causality relationship in almost every sector in Turkey.