Geopolitical risk and market sentiment: evidence from wavelet coherence and power spectrum analysis

Purpose Given escalating geopolitical tensions, such as trade disputes, regional conflicts and shifting economic alliances, global financial markets are undergoing increased volatility, influenced by the interaction between geopolitical risk and market sentiment. This article aims to examine the dynamic connection between geopolitical risks and sentiment in the gold, oil and stock markets. Design/methodology/approach The study employs monthly data on geopolitical risk, implied volatility index of gold, oil and stock as the proxy of market sentiment from June 2008 to January 2025 and utilizes sophisticated methodologies such as wavelet coherence, cross-power spectrum and time-varying parameter vector autoregression (TVP-VAR) to evaluate their dynamic interrelations and connectedness in both time and frequency domains. Findings The wavelet coherence analysis reveals that the relationship between geopolitical risk and market uncertainty in gold, oil and equity is not persistent throughout the full sample period, but rather intensifies during specific crisis episodes. TVP-VAR results indicate moderate, market-specific spillovers, with geopolitical risk largely driven by its own shocks, while gold market volatility emerges as the dominant transmitter, and oil and equity market volatilities function primarily as net receivers. Originality/value By integrating uncertainty and sentiment, this study offers new insight into the dynamic relationship between geopolitical uncertainty and market sentiment of gold, oil and stocks using advanced methodology.