Determinants of Geopolitical Risk spillovers: New Evidence from Developing Economies.

This study investigates the cross-country transmission of geopolitical risk (GPR) in Sub-Saharan Africa using locally constructed GPR indices from Eight economies. Our study introduces two key innovations. First, we develop the first set of locally sourced GPR indices for eight African economies, based on domestic news content, to accurately capture country-specific geopolitical dynamics often overlooked by global indices. Second, we apply both time-domain and frequency-domain spillover models to measure and characterize the cross-country GPR transmission and the determinants. The results reveal significant geopolitical interdependence in the region, with South Africa, Egypt, and Nigeria identified as major net exporters of GPR. Moreover, we find evidence of distinct regional clusters, with core economies exhibiting stronger transmission patterns than their West African counterparts. To investigate the underlying mechanisms driving geopolitical risk (GPR) spillovers, we estimate a cross-sectional regression based on a gravity model framework. The results reveal that bilateral trade intensity, geographic proximity, and macroeconomic fundamentals significantly shape the scale and direction of spillovers. Higher import flows from the origin to the recipient country are associated with reduced GPR transmission, while shared borders and a common language also attenuate spillover effects, suggesting regional familiarity may serve as a buffer. Conversely, higher foreign reserves in recipient countries are linked to greater sensitivity to external GPR shocks, potentially due to increased exposure or signaling effects. These findings provide a valuable basis for monitoring and managing transnational GPR transmission, particularly in the context of the African Continental Free Trade Area (AfCFTA). The study also provides important implications for policy markers to enhance institutional resilience, regional security cooperation, and adaptive governance mechanisms to support the AfCFTA’s goals of economic integration, trade facilitation, and harmonization.