Geopolitical Risks and Stock Market Volatility in the G7 Countries: A Century of Evidence from a Time-Varying Nonparametric Panel Data Model

In this paper, we analyze the role of global geopolitical risks (GPRs) on the realized volatility of Canada, France, Germany, Italy, Japan, the United Kingdom (UK), and the United States (US), i.e., the G7 countries, over the period 1917 to 2016. For our purpose, we use a time-varying nonparametric panel data model approach, which offers substantial efficiency gains in estimating the relationship in a time-varying manner, while controlling for nonlinearity and cross-sectional interdependencies across economies, unlike a time series-based model. We find that, GPRs can decrease or increase volatility contingent on the state of the two variables of concern, with attacks having a stronger impact on volatility than threats. Our results have important implications for investors and policymakers.