Financial Volatility in World Crisis

The word politics and volatility are often associated with each other, particularly in relation to the global financial markets. Political events such as elections, changes in government policies, and geopolitical tensions can cause volatility in financial markets. For example, a decision by a government to impose new tariffs on imports can cause market uncertainty and lead to market swings.

In addition, political instability in a country can also negatively affect its economy and the financial markets. Civil unrest, terrorism, and political turmoil can affect consumer confidence, business investment, and international trade.

On the other hand, politics can also play a positive role in stabilizing the financial markets through effective policy implementation. Governments can use monetary and fiscal policies to manage inflation, regulate interest rates, and ensure stability in the financial markets.

In summary, political events can have a significant impact on the financial markets, and investors should always keep a close eye on political developments to make informed investment decisions.

Financial volatility is a term used to describe fluctuations or changes in the prices of financial assets, such as stocks, bonds, or currencies. Here are some causes of financial volatility:

1. Global economic conditions: Economic indicators, such as inflation, GDP growth, or unemployment rates, can have a significant impact on the financial markets. For example, a sudden increase in inflation can lead to a decrease in asset prices due to a decline in the purchasing power of consumers.
2. Political events: Political events, such as elections, changes in political leadership, or geopolitical tensions, can cause uncertainty in the market and lead to fluctuations in asset prices.
3. Natural disasters and pandemics: Natural disasters, such as earthquakes and hurricanes, or pandemics, such as COVID-19, can lead to supply chain disruptions, decrease in consumer spending, and reduction in business activities, resulting in volatility in the financial markets.
4. Changing regulations: Changes in laws and regulations, such as tax policies or financial regulations, can cause uncertainty and volatility in the financial markets.
5. Market-related factors: Market-related factors, such as speculation, changes in interest rates, or unexpected fluctuations in currency exchange rates, can all lead to volatility in the financial markets.

Overall, financial volatility is a complex phenomenon influenced by a wide range of factors, and it can be difficult to predict. However, keeping informed of economic and political events can help investors prepare for the potential impact of volatility on their investment portfolios.

The outbreak of the war changed the sentiment of investors, who then had to deal with a series of other negative events in 2022, including the energy crisis, soaring inflation, the rise in interest rates and economic weakness. Thus the balance sheet of the European stock exchanges worsened and losses at the end of the year came close to 13% (the Morningstar Italy index -10%). Minus sign also for the world stock exchanges.

The new year began under the banner of purchases on international financial markets. One year after the outbreak of the war, the Morningstar European and global equity indices are back in the positive (as of February 21, 2023), but geopolitical risk remains a variable that should not be underestimated.

The lesson of past shocks

A look at the past can help us not lose our bearings, while remembering that reactions to geopolitical events have varied according to the case and the macroeconomic contexts. We have considered five past events that have to varying degrees increased the risk on the markets (see graph above), analyzing the performance twelve months after the shock and the maximum loss achieved (in technical jargon max drawdown, i.e. the decline from the peak to the minimum point during the period considered).

As an indicator of geopolitical risk, we used the GPR index (Geopolitical Risk Index), which measures adverse geopolitical events and the related risks, based on the number of newspaper articles concerning them and following their evolution. The current index starts from 1985, while the historic one dates back to 1900. The graph below shows its trend from 2000 to today.