The Pricing of Geopolitical Tensions over a Century

We study capital allocation and asset pricing consequences of geopolitical tensions using nearly 100 years of data. Leveraging widely adopted news-based geopolitical risk indices, we find that geopolitical threats (GPT) and acts (GPA) have markedly different implications. GPT closely tracks geopolitical risk perceptions and capital allocation decisions of investors and firms, is priced across different asset cross-sections, and predicts country-level equity premia. By contrast, GPA has weaker and less stable links to beliefs, capital allocation, and risk premia. These results are incremental to existing news-based measures of macro-financial uncertainty, including indices capturing war-related discourse and economic and trade policy risk.