Abstract
<title>Abstract</title> <p>This study analyses the dynamic spillover transmission and time varying correlation structure between geopolitical risk and major financial markets around the world from January 2005 to March 2026. The analysis builds a multi-asset framework that includes developed and emerging equity markets, commodities, exchange rates and market volatility to reflect the overall architecture of financial interconnections in the world. In terms of methodology, the study uses a Time-Varying Parameter Vector Autoregression (TVP-VAR) model to estimate the direction of the spillover effects, and the Dynamic Conditional Correlation GARCH (DCC-GARCH) model to evaluate the time-varying market co-movements and diversification dynamics. The results indicate that the global financial markets are deeply interconnected, and that most of the developed equity markets tend to be net transmitters of shocks, whereas the emerging markets, commodities and exchange rates are net receivers. Total connectedness is very volatile, and it surges significantly during systemic crisis periods, such as the Global Financial Crisis and the COVID-19 pandemic. The VIX is identified as an important transmission path of uncertainty, reflecting the role of global risk sentiment in the transmission of uncertainty across markets. The average spillover impact of geopolitical risk is modest, and it is more important during times of geopolitical uncertainty, indicating a non-linear and episodic effect. The DCC-GARCH results also show that the correlation between markets increase during crises, thereby limiting the effectiveness of international diversification. Lastly, the study reveals that geopolitical risk has a selective and regime specific impact on global financial markets and that the use of dynamic modelling is necessary to grasp the connections, linkages and diversification risks within an increasingly integrated financial system.</p>