ESTIMATING THE GEOPOLITICAL COMPONENT OF THE RISK PREMIUM IN THE RUSSIAN STOCK MARKET

Abstract

The article examines the geopolitical component of the risk premium across the main asset classes in the Russian stock market. Since February 2022, geopolitical risk has become a systemic factor affecting the pricing of financial instruments and the rates of return required by investors. The purpose of the study is to provide a quantitative estimate of the geopolitical risk premium for Russian equities, government bonds, and corporate bonds. The Caldara–Iacoviello Geopolitical Risk Index (GPR) is used as an indicator of geopolitical tensions. Regression analysis is employed to estimate the sensitivity of excess returns across the selected asset classes to changes in geopolitical risk, after which the geopolitical component of the risk premium is calculated. The results indicate that an increase in geopolitical tensions has a negative effect on the excess returns of Russian financial assets. The geopolitical risk premium is found to persist not only during the acute phase of the 2022 shock but also in subsequent years, although its magnitude declines as the market adapts to the new environment. The analysis also reveals substantial variation across asset classes: the estimated premium for government bonds is higher than that for corporate bonds. The findings suggest that, since February 2022, geopolitical risk has become a persistent component of the required return on the main asset classes in the Russian stock market.