Font Size: a A A

Geo-conflict Risk And Global Asset Return

Posted on:2020-10-18Degree:DoctorType:Dissertation
Country:ChinaCandidate:G Y WangFull Text:PDF
GTID:1486306521470314Subject:Finance
Abstract/Summary:PDF Full Text Request
Market Efficiency is the core concept of finance.It means that market trading characteristics can reflect market information,thus having the function of collecting information and market forecasting.This paper extends this concept from the financial market to the international economic and trade market,extracts the geo-conflict risk from the structural characteristics of international trade and investment,and uses this geo-conflict risk information to test its impact on capital market returns.Specifically,we first measure the "geo-economic distance"variable according to the international trade and investment flow information to measure the relationship between countries;secondly,test and predict the geo-political risk based on the "geo-economic distance";finally,use the predicted geo-political risk to test the impact of geo-conflict risk on asset returns.The focus and difficulty of this paper is how to use the effectiveness of the international economic and trade market,measure the relationship between countries(geo-economic distance)and how to analyze geo-conflict risk(analysis of international conflict mechanisms).First,we analyze the mechanism of international conflicts,and then construct the "geo-economic distance" indicator to measure geo-conflict risk according to this logic.Our definition of geo-conflict risk is the probability of conflict between countries.We understand the mechanism of geo-conflict conflict from the perspective of international relations realism.Realism in international relations believes that security is a public good and is provided by the dominant players.The fundamental driving force behind the order leader's maintenance of order is that the world order conforms to its preferences and interests.The deviation of other economies from the existing order,whether caused by the initiative or passiveness of the order leader,will lead to the reshaping of order,which will cause changes in geo-conflict risks.Therefore,the logical starting point of this paper for geo-conflict risk analysis is the cost and benefit of the order leader.Analysis of the cost-benefit pattern in the United States.The logical starting point of this paper's geo-conflict risk analysis is the fact that the world economic trade order is dominated by the United States after the Cold War.In order to maintain the US unipolar order,there will inevitably be a certain cost or "paradox." Compensating for these costs necessarily requires this order to give the United States additional benefits or "excessive privilege": first,in terms of trade,the United States can use its unipolar status to profit in this system(Bhagwati and Patrick 1990;Kapstein 1994;Stremlau)1994/95;Caverley 2007;Ning 2009).Since the 1990s,the United States has increasingly used unfair trade,currency manipulation,and politics and diplomacy to help American companies enter other countries' markets(Stremlau 1995;Tyson 1992;Bhagwati and Patrick 1990),or in trade.Advantageous arrangements for domestic industries,especially for industries with high added value and high labor compensation,within the framework of the organization and in negotiations(Mastanduno 1997).Correspondingly,any bilateral or multilateral trade regionalization and internalization that excludes the United States or may reduce its share is contrary to the US interest.Second,maintaining the openness of global capital markets is beneficial for other countries to support the dollar's world currency status by investing in the United States,owning US assets,particularly US dollar reserves,and clearing international transactions in US dollars.The core mechanism for the United States to adjust its order to maintain the contradiction between cost and economic competitiveness must be based on the dollar's world currency status.The world currency status of the US dollar not only makes military spending based on low-cost government financing possible,but also avoids exchange rate risk through this position(Gourinchas and Rey 2005)and benefits from any change in the US dollar against other currencies.It makes it possible for domestic high welfare and corporate low-cost financing compared to other countries(Drezner 2009;Nye 2010).Deviations from the economy's interests in the United States can lead to changes in geo-conflict risks.The relative change in the speed of national economic growth reflects the shift in the power of the country.More and more literature studies believe that China,which has maintained rapid economic growth for a long time,is becoming the other pole after the unipolar order disintegration.The Chinese factor may also be an important influencer of the economic geo-conflict risk change.The above analysis of costs and benefits shows that international trade and investment market information may imply the characteristics of inter-state relations.We believe that when the economic and trade flows of one country with another are higher than the "standards" that the two countries should have,the relationship between them is closer;on the contrary,the relationship is further.The concept of relative acceptance proposed by Savage and Deutsch(1960)can be used for any two-way flow(economic and non-economic)analysis.The S-D model is also known as the "null model." Taking trade as an example,the idea of a"null model" is: assuming that the import and export choices of the economy are completely independent and random,then a set of parameters can be found to describe the trade generated by these stochastic behaviors.If the best-fit stochastic parameters can well describe the trade behavior between countries,then the trade between the relevant countries and economies can be interpreted by random behavior without obvious preference or exclusion.If the trade behaviors between the relevant countries or economies deviate significantly from the fitted parameters under random trading conditions,the model considers that there is a clear preference or exclusion between the parties,and its behavior is not random.The deviation of the actual trade investment behavior from the optimal random fit value is called relative acceptance.The larger the indicator,the stronger the preference and exclusion between the parties.A more technical expression is that if the import and export choices of any economy are completely independent,then the share of the economy i exporting to the economy j in the world's total trade volume should be the total export of the economy i the product of the percentage of total exports(or total global foreign investment)in the world and the percentage of total imports of the economy in the world's total imports(or global total foreign investment),ie the probability of joint distribution of two independent random variables is the product of the edge distribution probabilities.However,the actual trade share and this theoretical proportion will deviate.According to the relative acceptance variables,simple arithmetic averaging and the "geo-economic distance" indicator can vividly describes the preferences between countries.Based on the magnitude and change of "geo-economic distance",we can measure the inter-country preferences or the deviation of the existing order.We assume that the geo-economic distance between a country and the US can predict the magnitude of its geo-conflict risk;The geoeconomic distance with china needs to be analyzed according to the state of different periods.We use the LOGIT model to fit the relationship between "geo-economic distance" and "whether geo-conflict risk occurs" and test that "geo-economic distance" has the role of measuring geo-conflict risk.Then,using the LOGIT model,we estimate the likelihood of a geologic conflict.Then we return the estimated geo-conflict risk,equity premium and its volatility,equity asset returns and volatility,debt asset returns and volatility to test the role of geo-hazard in asset pricing.The main conclusions of the article: 1.We propose the concept of"geo-economic distance" and measure it according to the S-D model and the international trade investment flow.This concept directly refers to the close relationship between countries and can predict the probability of geo-conflict conflict.Among them,the geo-economic distance between the United States and China is the focus of our concern.These two countries are important influencers of the world order after the Cold War.Whether it is Chinese factors or other factors,changes in the structure of the world economy will affect the cost-benefit pattern of the United States.However,an economy that deviates from the interests of the United States will increase the probability of geo-conflict conflict.2.Our results show that the geo-economic distances of other countries to China and the United States and the changing trends of these two distances indicate that the general trend of the international pattern after the disintegration of the Soviet Union is from the US unipolar to the Sino-US bipolar,and the geo-economic distance can predict the global geological conflicts and crises;since the collapse of the Soviet Union,the occurrence pattern of geo-conflict crises has different characteristics at different stages.From the 1990 s to the beginning of the21 st century,a country was alienated from the United States while close to China would significantly increase its risk of being involved in geo-conflict conflicts;since then,China has begun to accept,emphasize,and practice the transformation from system dependence to system shaping in terms of willingness,ability,and behavior.A country being away from the United States does not necessarily increase risk,and geo-conflict conflicts begin to occur more in the core countries in the Sino-US order circle.3.Geo-conflict risk is indeed a factor that affects the price and volatility of international capital markets,enriching the series of explanations of the theory of disaster risk to the mystery of equity premium.After controlling the risk aversion coefficient and other country risk factors,we found that the geo-conflict risk estimation is positively related to the equity premium;positively related to equity returns;and negatively correlated with the yield of credit assets.At the same time,geo-conflict risk estimation is positively correlated with equity premium volatility;positively correlated with equity return volatility;negatively correlated with credit yield volatility.There are three main innovations in this paper: 1.We predict the risk of international conflict by constructing the "geoeconomic distance" variable and measure the link between international politics and economy in global governance.Currently,there is little literature linking this emerging geo-conflict risk analysis art with methods and theories in the field of international relations(F?gersten 2015).2.Geo-economics distance measures are used to supplement the predictive market literature(Wolfers and Zzezewitz 2009),which focuses on the information efficiency of embedded structural changes rather than the market transaction price changes that are routinely used.We use the S-D model to extract structural information from the international economic and trade market,and there is a clear breakthrough compared to the total information(such as transaction price)that is widely used in existing literature.3.Enrich the "rare disaster theory" study(Rietz 1988;Barro 2006;Wachter2013;Gabaix 2012).Due to the small probability of disaster events,especially the perception difficulty to the rare disasters,it is difficult to empirically test the relationship between disaster events and asset pricing.Berkman,Jacobson and Lee(2011)are reoresentatives who firstly use the international crisis as rare disasters.Contrary to the estimation of the international conflict risk of the AR model,we propose the basic mechanism of international conflict and use the effectiveness of the market absorbing information to achieve this goal.
Keywords/Search Tags:geo-conflict risk, international trade and investment, geo-economic distance, rare disaster, equity premium puzzle
PDF Full Text Request
Related items