Context-dependent responses to geopolitical risk in Middle Eastern and African stock markets: An asymmetric volatility spillover study

This paper examines the asymmetric volatility spillover impact of geopolitical risk on stock market returns across six Middle Eastern and African (MEA) economies: Egypt, Israel, Saudi Arabia, Tunisia, Turkey, and South Africa. Using the asymmetric MGARCH (Multivariate GARCH) model of BEKK (Baba, Engle, Kraft, and Kroner), the study identifies different responses to geopolitical risk (GPR) index in these markets and its division into act- and threat-related components. The results show that the susceptibility and responses to these risks are highly contextdependent, reflecting the unique economic and geopolitical structures of each market. Moreover, these economies exhibit an asymmetric response to geopolitical risk, highlighting the importance of not only the magnitude but also the direction of these risks. The study underscores the need for investors to adopt a nuanced view of geopolitical risk and its multifaceted impacts on different markets. These findings hold valuable implications for investment decisions and policy-making in these economies.