Dynamic Interlinkages Between Emerging and Developed Markets Under Global Risk and Geopolitical Uncertainty

Abstract

This study looks at how geopolitical risk, global financial volatility, oil price changes, and stock market returns connect dynamically in developed and emerging economies. It uses a vector autoregression approach and applies Granger causality tests, impulse response functions, and forecast error variance decomposition to track both short-term reactions and long-term transmission patterns. The findings show that Global financial volatility, proxied by the US VIX, drives shocks across all markets and has strong, lasting effects on equity returns. Geopolitical risk demonstrates some persistence, but its direct spillovers are limited. Developed markets respond mainly to global volatility. Emerging markets have displayed more heterogeneity and react more strongly to volatility and oil price shocks. When oil prices are added to the analysis, spillover effects become stronger in emerging markets. Overall, volatility and commodity markets have a direct impact on returns, while geopolitical risk works mostly through indirect channels.