The Interplay of Geopolitical Risk and International Capital Markets Stability

Abstract

Geopolitical risk has become an increasingly important factor shaping global financial dynamics, influencing investor sentiment, capital flows, and the overall stability of international capital markets. In an era of rising interconnectedness, geopolitical tensions such as armed conflicts, diplomatic disputes, and trade wars generate significant disruptions across financial systems, affecting asset pricing, market expectations, and volatility levels. This study employs a Systematic Literature Review (SLR) to synthesize current evidence on how geopolitical shocks propagate through macroeconomic and financial channels. The findings reveal that geopolitical risk contributes to heightened market volatility, liquidity shifts, safe-haven movements, and structural vulnerabilities within global markets. Emerging economies are found to be particularly sensitive due to their exposure to external capital flows and limited shock absorption capacity. At the firm level, geopolitical uncertainty leads to reduced investment activity and delayed strategic decision-making. Overall, the review highlights that geopolitical risk is a multidimensional force that not only generates short-term market instability but also poses long-term challenges for global financial resilience. These insights emphasize the need for policymakers and institutions to integrate geopolitical considerations into risk management, regulatory frameworks, and financial stability strategies.