Does geopolitical risk influence foreign investors’ decisions in the stock market? An ARDL approach

Abstract This paper aims to investigate the relationship between geopolitical risk and foreign investor sentiment in the Malaysian and Indonesian stock markets. This research considers other macroeconomic variables, such as oil price, real effective exchange rate, and lending rate, as the controlled variables. This analysis uses the autoregressive distributed lag (ARDL) model to estimate the long-run relationship of selected geopolitical risk indices, specifically from the USA, China, Malaysia, and Indonesia, on foreign investor trading behaviour (buy and sell). The finding shows that China's geopolitical risk will increase the trading volume of foreign buyers and sellers in the Malaysian stock market. The China-US geopolitical risk has both negative and positive effects on foreign investor trading behaviour in the Indonesian stock market. The Indonesian geopolitical risk has a significant positive effect on foreign buyers' trading. This indicates foreign investors consider foreign geopolitical risk before making their own decision. The policymaker must actively be involved in formulating the policy to enhance the market stability measures to ensure the foreign investor confidence in the Malaysia and Indonesia stock markets.