RIEB Discussion Paper Series No.2025-32

Title

Geopolitical Risk and Extreme Capital Flow Episodes

Abstract

This paper examines whether geopolitical risk (GPR) affects the occurrence of extreme capital flow episodes. Using a quarterly panel of 57 economies from 1986Q1 to 2023Q4, we estimate complementary log-log models for four episode types: surge, stop, flight, and retrenchment. We compare the effects of global and country-specific GPR and examine heterogeneity across advanced and emerging economies. Global GPR shows little systematic association with extreme capital flow episodes. By contrast, country-specific GPR is significantly associated with extreme capital flow episodes in emerging economies: higher country-specific GPR lowers the probability of surge episodes and raises the probabilities of stop, flight, and retrenchment episodes. Flow-type decompositions indicate that banking flows mainly drive flight episodes, direct investment drives stop episodes, and banking, debt, and equity flows contribute to retrenchment episodes. The results further suggest that country-specific GPR has become a more important driver of extreme capital flow episodes in emerging economies after the global financial crisis.

Keywords

Global geopolitical risk; Country-specific geopolitical Risk; Extreme capital flow episodes; Emerging economies; Flight-to-safety; Flighthome effects

JEL Classification

E44, F32, F51, G28, G32

Inquiries

Yang ZHOU
Graduate School of Economics, Nagoya City University, JAPAN

Shigeto KITANO
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059