The Impact Of Geopolitical Risk On Volatility Of Stock Return And Stock Liquidity

The geopolitical risk of Taiwan is one of the biggest geopolitical risks faced by China at present.Based on the monthly occurrence frequency of "geopolitical uncertainty in Taiwan of China" in 13 major newspapers published in China,we constructed the Taiwan of China Geopolitical Risk Index(TWGPR),which could well reflect the past geopolitical risks of Taiwan,China.Then,by analyzing the annual financial statements of A-share listed companies,we screened out the Taiwan related listed companies of A-share,calculated the volatility of stock return of Taiwan-related A-share listed companies as well as the stock liquidity of related enterprises.After that,we construct a time-varying parameter vector autoregression(TVP-VAR)model with the logarithm of Taiwan’s geopolitical risk index,the A-share Taiwan related listed companies’ volatility of stock return and stock liquidity.We discovered that:(1)The rise of geopolitical risk of Taiwan of China will exacerbating the volatility of stock return of Taiwan-related A-share listed companies,and this influence is stable from July 2001 to December 2020;(2)The rise of geopolitical risk of Taiwan of China will reducing the stock liquidity of Taiwan-related A-share listed companies,and this impact is stronger and stronger over time;(4)The rise of volatility of stock return of A-share Taiwan related listed companies will lead to a decrease in their stock liquidity,which is time-varying and becomes stronger over time;(3)The impact of stock liquidity of A-share Taiwan related listed companies on their stock return volatility has strong time-varying characteristics: before the 2015 "stock disaster",the rise of stock liquidity of A-share Taiwan related listed companies will lead to an increase in their volatility of stock return;After the 2015 "stock disaster",their volatility of stock return will decrease.Based on the above,this paper puts forward the following suggestions:(1)Investors should strengthen their financial literacy,enhance the collection of information on relevant stocks,identify whether relevant stocks have economic correlation with Taiwan,take risk prevention measures to deal with potential geopolitical risks,clarify their risk preferences,control investment risks according to their risk tolerance,invest prudently;(2)Listed companies should strengthen their ability to resist risks,expand their import and export markets and channels,and reducing their dependence on the single market,pay attention to the diversification of investment;Take full consideration to the political background of the investment target and the impact of geopolitical risks it may suffer before investing;The information disclosure of geopolitical risks of the company also should be strengthened,so as to reduce the information asymmetry between the company,markets and investors,improve the confidence of investors,to avoid the damage of company’s interests caused by market panic and investor stampede.(3)The government should establish a long-term early warning mechanism for geopolitical risks,strengthen the real-time monitoring of geopolitical risks in Taiwan of China,guide enterprises to avoid risks,reduce enterprise losses,provide policy assistance for some enterprises susceptible to geopolitical risks,and consolidate the system and mechanism of effective financial support for the real economy;Strengthening the education and guidance for investors to enhance their understanding and perception of geopolitical risks and reduce investors’ anxiety and its possible negative impact on the market;Strengthening the forward-looking regulation of geopolitical risks in Taiwan of China,reasonably release policy signals,stabilize market expectations,prevent excessive fluctuations or liquidity depletion in related assets,scientifically prevent and resolve geopolitical risks.