Geopolitical risks and global capital flows: divergent vulnerabilities in emerging and advanced economies

Chokri Zehri, Latifa Saleh Ben Ammar and Wissem Ajili Ben Youssef ()
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Chokri Zehri: PSAU - Prince Sattam Bin Abdul-Aziz University
Latifa Saleh Ben Ammar: PSAU - Prince Sattam Bin Abdul-Aziz University
Wissem Ajili Ben Youssef: Métis Lab EM Normandie - EM Normandie - École de Management de Normandie = EM Normandie Business School

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Abstract: Recent geopolitical risk surges marked by conflicts, trade wars, and strategic decoupling have intensified global capital flow volatility, revealing new dynamics in how investors and economies navigate uncertainty. We examine how these risks reshape capital flow dynamics across 55 countries (1990–2023), contrasting vulnerabilities between emerging market economies and advanced economies. Using an autoregressive distributed lag model applied to panel data alongside impulse response analyses, we investigate the asymmetric effects of GPR on debt, equity, and portfolio flows, controlling for global factors (e.g., oil price volatility, U.S. monetary policy) and domestic economic conditions. Results reveal that sustained geopolitical risk increases debt and portfolio inflows (flight to safety) but suppresses equity inflows while amplifying capital outflows. Short-term impacts are muted, reflecting delayed portfolio adjustments. EMEs experience fourfold stronger sensitivity to GPR than advanced economies, driven by structural weaknesses like foreign capital dependence. The post-2008 crisis exacerbates these trends, with impulse response functions showing abrupt equity outflow surges versus gradual debt flow declines post-shock. These findings urge policymakers to prioritize emerging market economies' resilience and tailor stability measures to capital flow types and global linkages.

Keywords: Uncertainty; Volatility; Geopolitical risks; Capital flows (search for similar items in EconPapers)
Date: 2025-07-04
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Published in Eurasian Economic Review, 2025, ⟨10.1007/s40822-025-00326-x⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05235820

DOI: 10.1007/s40822-025-00326-x

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