The Impact of Geopolitical Risks on Financial Development: Evidence from Emerging Markets
Zhou Lu, Giray Gozgor, Mai Huang, Marco Chi Keung Lau
Keywords:
financial sector development, credits to the private sector, domestic lending, geopolitical risks, emerging
markets, competitiveness, panel data methods
Abstract:
This paper aims to investigate the effect of geopolitical risks on financial development (measured
by domestic credit to the private sector) in a panel dataset of 18 emerging markets over the
period 1985-2018. The results from the fixed-effects estimations indicate that an increase in
geopolitical risks leads to a lower level of domestic credit to the private sector. The findings from
the bias-corrected least-squares dummy variable estimations also confirm that geopolitical risks
impacts negatively on domestic credit to the private sector. In terms of controls, we have found
that per capita income and broad money are positively associated with domestic lending. Further,
external imbalances were found to suppress domestic credit in emerging markets. Various
additional controls were then included to address potential omitted variable bias. Moreover, we
utilized multiple robustness checks, such as excluding countries from different continents as well
as extracting outlier observations. According to the findings from these robustness checks, the
negative impact of geopolitical risks on domestic lending is statistically and economically robust.
To the best of the author’s knowledge, this paper is the first to provide evidence for the negative
impact of geopolitical risks on financial development in emerging markets, the economic
performance of which can slow down as competitiveness deceases due to concomitant threats.
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 The Impact of Geopolitical Risks on Financial Development: Evidence from Emerging Markets [PDF file] [Filesize: 514.19 KB]
 10.7441/joc.2020.01.06
Lu, Z., Gozgor, G., Huang, M., & Lau, C. K. M. (2020). The Impact of Geopolitical Risks on Financial
Development: Evidence from Emerging Markets. Journal of Competitiveness, 12(1), 93–107. https://doi.org/10.7441/joc.2020.01.06
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