Do the Fama–French Factors Proxy Geopolitical Risks?

This article investigates whether geopolitical risk measures have some statistical significance for 20 advanced country equity portfolios in the presence of the Fama–French factors. Baseline regression results indicated that some Fama–French factors appear to be significant for some country and regional equity portfolios. The coefficient of the general geopolitical risk index emerged with a negative sign but not always as statistically significant. The authors used geopolitical threats and acts and found that they marginally added statistical significance beyond what the main risk index provided. Finally, the authors included some macro variables in these regressions and found that the term and credit spreads and the stock market’s dividend yield surfaced as significant. The authors conducted further analyses using panel specification and the Fama–MacBeth methodology. In general, the main findings imply that geopolitical risks may not always be statistically relevant to country equity portfolios in the presence of, at least, the market factor.