Effects of Geopolitical Risk on Short- and Long-Term Volatility in Emerging Stock Markets

This paper examines the role of geopolitical risk (GPR) as an exogenous variable in explaining volatility in emerging Central European stock markets, aiming to assess whether differences in investors' perceptions of global geopolitical risk are reflected in heterogeneous effects across markets that are shallower and less liquid, and therefore more sensitive to wars, international conflicts, and political tensions. To address the limitations of standard single-frequency GARCH models, the study employs a GARCH-MIDAS framework that separates short-run volatility from long-run volatility, the latter being associated with geopolitical shocks observed at lower frequencies. Complementarily, a GARCH-X specification is used to examine the contemporaneous impact of daily GPR on short-term volatility. The results indicate that the short-run effect of geopolitical risk is limited or statistically insignificant, while monthly GPR is a strong driver of longrun volatility in the Polish, Czech, and Romanian markets, with weaker intensity in the Croatian and Bulgarian markets, and an opposite effect identified in the Hungarian market. The findings have important implications for institutional investors in improving risk management across different investment horizons, as well as for policymakers in designing timely responses to mitigate the impact of geopolitical shocks on these markets.