Geopolitical risk and the volatility of GCC stock markets around the war on the Gaza Strip

Abstract

We investigate the short- and long-term interconnectedness between geopolitical risk (GPR) and the volatility of six Gulf Cooperation Council (GCC) stock markets during the recent war on the Gaza Strip (GS). Applying a frequency-based connectedness approach to daily data from July 2022 to January 2024, we reveal that during this war period, GPR-stock volatility interconnectedness has strengthened, with GPR being the net transmitter of shocks. The volatility in GCC markets is more sensitive to GPR shocks than oil implied volatility (OVX) shocks. The total connectedness is mainly driven by the short-term component, reflecting the transitory shift impact of the war on investors' expectations resulting in heightened stock uncertainty. These results withstand the application of the extended joint connectedness model and have valuable implications for traders, investors, regulators, and policymakers.