## Geopolitical Risks: Implications for Asset Prices and Financial Stability

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**Canonical URL:** [Geopolitical Risks: Implications for Asset Prices and Financial Stability](https://www.imf.org/-/media/files/publications/gfsr/2025/april/english/ch2sum.pdf)

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### Overview
- Global geopolitical risks remain elevated, raising concerns about their potential impact for macro-financial stability.
- A rise in geopolitical risks that prevents cross-border trade and investment activity, or raises uncertainty, can trigger a reallocation of capital flows, disrupt supply chains or inflict adverse demand shocks on an economy.
- These disruptions can lower asset prices, in turn affecting the intermediation capacity of financial institutions and raising the risk of a negative macro-financial feedback loop.
- Chapter 2 of the latest Global Financial Stability Report assesses the impact of geopolitical risk events on prices of financial assets and discusses potential policy measures for maintaining financial stability.

### Impact on asset prices
- Geopolitical risk events generally exert a modest influence on asset prices.
- Major events, particularly military conflicts, can lead to a substantial decline in stock prices and raise sovereign risk premiums, especially in emerging market economies with limited fiscal space or international reserve buffers.
- Investors tend to price geopolitical risk into equity and option markets to some extent, but the materialization of these risks can trigger financial market volatility.

### Cross-border propagation and channels
- Geopolitical risks can propagate to other countries through trade and financial linkages, or changes in global commodity prices.
- Firm stock prices are significantly lower if a country’s main trading partner is involved in an international military conflict.

### Effects on financial institutions and markets
- Geopolitical risk events can weigh on the stability of banks and nonbank financial institutions, especially in emerging market economies.
- Bank equity tends to decline when its home country or key foreign counterparts are involved in an international military conflict, contributing to a decline in lending activity.
- Investment funds exposed to countries involved in a conflict tend to experience lower returns and higher outflows.

### Policy recommendations and resilience measures
- Financial institutions and their oversight bodies should allocate sufficient resources to identify, quantify, and manage geopolitical risks, including through stress testing and scenario analysis.
- Emerging market and developing economies should continue efforts to develop and deepen financial markets and maintain adequate fiscal policy space and international reserves to cushion against adverse geopolitical shocks.

*Source: Chapter 2 summary, Global Financial Stability Report (ch2sum).*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2025/april/english/ch2sum.pdf_