The Impact of Geopolitical Risks and Uncertainties on Equity Financing Costs: Evidence from Türkiye

Year 2025, Volume: 12 Issue: 2, 467 - 485, 13.08.2025

Elif Kaya

https://doi.org/10.26650/JEPR1707992

Abstract

This study analyses the impact of geopolitical risk (GPR) on the cost of capital in the Turkish banking sector by using autoregressive distributed lag (ARDL), dynamic conditional correlation (DCC), and generalised autoregressive conditional variance (GARCH) models. Using monthly data for the period 2005M01- 2025M03, in the paper, the long and short-term relationships between GPR and equity financing and analyses the dynamic evolution of these rela tionships are examined over time. The ARDL model results demonstrate that GPR has a borderline significant impact on the cost of capital in the long run, while macroeconomic indicators such as the exchange rate and the policy rate have much stronger and statistically significant effects. In particular, the exchange rate is strongly positively correlated with the cost of capital, reflecting the dependence on foreign currency borrowing in the Turkish banking sector. Meanwhile, the policy rate is observed to have a stabilising effect. Short-term forecasts also emphasise the sensitivity of the cost of capital to geopolitical shocks, especially during periods of heightened regional tensions. The DCC-GARCH model confirms that the correlation between the GPR and the cost of capital is positive and increases over time. This tendency is predominantly evident in the post-2018 period, coinciding with increasing regional conflicts and domestic political instability. Moreover, inflation is found to be significantly associated with the cost of capital, while its link with exchange rate volatility reveals the interconnectedness of macroeconomic variables in emerging economies.

JEL Classification : F65 , F34 , F51

Keywords

Geopolitical risks , Equity financing , Banking sector , Uncertainty in economy

References

• Aaron, Y. Zelin, and Soner Cagaptay. 2025. ‘A New Age for Turkish Relations with Syria | The Washington Institute’. Retrieved March 31, 2025 (https://www.washingtoninstitute.org/policy-analysis/new-age-turkish-relations-syria). google scholar
• Afonso-Rodríguez, Julio A. 2017. ‘Evaluating the Dynamics and Impact of Terrorist Attacks on Tourism and Economic Growth for Türkiye’. Journal of Policy Research in Tourism, Leisure and Events 9(1):56–81. doi: 10.1080/19407963.2016.1231196. google scholar
• Aiswarya Selva and Muthumeenakshi Muthu. 2024. ‘Exploratory Bibliometric Analysis on Geopolitical Risk’. International Research Journal of Multidisciplinary Scope 05(04):1180–97. doi: 10.47857/irjms.2024.v05i04.01652. google scholar
• Altıner, Ali, and Eda Bozkurt. 2023. ‘Reflections of Geopolitical Risk on Foreign Direct Investments: The Case of Türkiye’. İnsan ve Toplum Bilimleri Araştırmaları Dergisi 12(3):1292–1309. doi: 10.15869/itobiad.1271884. google scholar
• Arif, Imtiaz, Amna Sohail Rawat, and Muhammad Shahbaz. 2020. ‘Impact of US Economic Policy Uncertainty on Geopolitical Risk. Evidence from the BRIC Economies’. Public Finance Quarterly 65(4):485–96. doi: 10.35551/PFQ_2020_4_3. google scholar
• Bollerslev, Tim. 1990. ‘Modelling the Coherence in Short-Run Nominal Exchange Rates: A Multivariate Generalised Arch Model’. The Review of Economics and Statistics 72(3):498–505. doi: 10.2307/2109358. google scholar
• Bondarenko, Yevheniia, Vivien Lewis, Matthias Rottner, and Yves S. Schüler. 2023. ‘Geopolitical Risk Perceptions’. SSRN Electronic Journal. doi: 10.2139/ssrn.4441353. google scholar
• Caldara, Dario, and Matteo Iacoviello. 2018. ‘Measuring Geopolitical Risk’. International Finance Discussion Papers 2018.0(1222):1–66. doi:10.17016/ifdp.2018.1222. google scholar
• Carney, R. W., Sadok El Ghoul, Omrane Guedhami, and He (Helen) Wang. 2024. ‘Geopolitical Risk and the Cost of Capital in Emerging Economies’. Emerging Markets Review 61:101149. doi: 10.1016/j.ememar.2024.101149. google scholar
• Demir, Ender, Serdar Simonyan, Ming-Hsiang Chen, and Chi Keung Marco Lau. 2020. ‘Asymmetric effects of geopolitical risks on Turkey’s tourist arrivals’. Journal of Hospitality and Tourism Management 45:23–26. doi: 10.1016/j.jhtm.2020.04.006. google scholar
• Engle, Robert. 2002a. ‘Dynamic Conditional Correlation: A Simple Class of Multivariate Generalised Autoregressive Conditional Heteroskedasticity Models.” Journal of Business & Economic Statistics 20(3):339–50. google scholar
• Engle, Robert. 2002b. ‘Dynamic Conditional Correlation: A Simple Class of Multivariate Generalised Autoregressive Conditional Heteroskedasticity Models. Journal of Business & Economic Statistics 20(3):339–50. google scholar
• Engle, Robert. 2002c. ‘Dynamic Conditional Correlation: A Simple Class of Multivariate Generalised Autoregressive Conditional Heteroskedasticity Models. Journal of Business & Economic Statistics 20(3):339–50. google scholar
• Engle, Robert, and Kevin Sheppard. 2001. Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH. NBER Working Paper. 8554. National Bureau of Economic Research google scholar
• Flouros, Floros, Victoria Pistikou, and Vasilios Plakandaras. 2022. ‘Geopolitical Risk as a Determinant of Renewable Energy Investments’. Energies 15(4):1498. doi: 10.3390/en15041498. google scholar
• Foglia, Matteo, Giulio Palomba, and Marco Tedeschi. 2023. ‘Disentangling the Geopolitical Risk and Its Effects on Commodities. Evidence from a Panel of G8 Countries. Resources Policy 85:104056. doi: 10.1016/j.resourpol.2023.104056. google scholar
• Hamilton, James D. 2008. ‘Macroeconomics and ARCH’. NBER Working Papers. google scholar
• Hassan Khan, Mehmood Ul. 2018. ‘SD ANALYSIS - US-Türkiye Trade War’. Retrieved 31 March 2025 (https://www.sde.org.tr/analizler/sd-analysis-us-Türkiye-trade-war-analizi-6860). google scholar
• Kilic, Enes. 2025. ‘Geopolitical Instability Tops Türkiye’s Risks: Report - Türkiye Today’. Retrieved 31 March 2025 (https://www. turkiyetoday.com/turkiye/geopolitical-instability-tops-turkiyes-risks-report-119147/). google scholar
• Klement, J. 2021. ‘Geo-Economics Introduction: Geopolitics for Investors’. SSRN Electronic Journal. doi: 10.2139/ssrn.3760684. google scholar
• Kyriazis, Nikolaos A., and Emmanouil-M. L. Economou. 2022. ‘The Impacts of Geopolitical Uncertainty on the Turkish Lira during the Erdoğan Administration’. Defence and Peace Economics 33(6):731–50. doi: 10.1080/10242694.2021.1904200. google scholar
• Mansour-Ichrakieh, Layal, and Hussein Zeaiter. 2019. ‘The Role of Geopolitical Risks on the Turkish Economy Opportunity or Threat’. The North American Journal of Economics and Finance 50:101000. doi: 10.1016/j.najef.2019.101000. google scholar
• Ozkahraman, Cemal. 2017. ‘Failure of Peace Talks between Türkiye and the PKK: Victim of Traditional Turkish Policy or of Geopolitical Shifts in the Middle East?’ Contemporary Review of the Middle East 4(1):50–66. doi: 10.1177/2347798916681332. google scholar
• Papastamou, Andreas. 2023. ‘How Safe Are We? Shaping European Economy by Geopolitical Shocks’. Actual Problems of Economics 1(261):43–50. doi: 10.32752/1993-6788-2023-1-261-43-50. google scholar
• Park, Bill. 2012. ‘Türkiye, the US and the KRG: Moving Parts and the Geopolitical Realities. Insight Türkiye. google scholar
• Pehlivanlı, Davut. 2025. ‘Türkiye Risk Raporu 2025-GRC MANAGEMENT’. Retrieved March 31, 2025 (https://www.grcmngmnt.com/2025-2/). google scholar
• Perles-Ribes, José Francisco, Ana Belén Ramón-Rodríguez, L. Moreno-Izquierdo, and María Teresa Torregrosa Martí. 2018. ‘Winners and Losers in the Arab Uprisings: A Mediterranean Tourism Perspective’. Current Issues in Tourism 21(16):1810–29. doi: 10.1080/13683500.2016.1225697. google scholar
• Pesaran, M. Hashem, Yongcheol Shin, and Richard J. Smith. 2001a. ‘Bounds Testing Approaches to the Analysis of Level Relationships’. Journal of Applied Econometrics 16(3):289–326. google scholar
• Pesaran, M. Hashem, Yongcheol Shin, and Richard J. Smith. 2001b. ‘Bounds Testing Approaches to the Analysis of Level Relationships’. Journal of Applied Econometrics 16(3):289–326. doi: 10.1002/jae.616. google scholar
• Shabir, Mohsin, Ping Jiang, Yasir Shahab, and Peng Wang. 2023. ‘Geopolitical, Economic Uncertainty and Bank Risk: Do CEO Power and Board Strength Matter?’ International Review of Financial Analysis 87:102603. doi: 10.1016/j.irfa.2023.102603. google scholar
• Sharif, Arshian, Chaker Aloui and Larisa Yarovaya. 2020. ‘COVID-19 Pandemic, Oil Prices, Stock Market, Geopolitical Risk and Policy Uncertainty Nexus in the US Economy: Fresh Evidence from the Wavelet-Based Approach’. International Review of Financial Analysis 70:101496. doi: 10.1016/j.irfa.2020.101496. google scholar
• Smales, Lee A. 2019. ‘Geopolitical Risk and Volatility Spillovers in Oil and Stock Markets’. SSRN Electronic Journal. doi: 10.2139/ ssrn.3414134. google scholar
• Su, Chi-Wei, Khalid Khan, Muhammad Umar, and Weike Zhang. 2021. ‘Does renewable energy redefine geopolitical risks?’ Energy Policy 158:112566. doi: 10.1016/j.enpol.2021.112566. google scholar
• Sweidan, Osama D. 2023. ‘The Effect of the US Macroeconomic Indicators on the International Geopolitical Risk. Defence and Peace Economics 34(4):495–511. doi: 10.1080/10242694.2022.2034103. google scholar
• Tütüncü, Asiye. 2024. ‘Geopolitical Risk and Tourism in Türkiye’. Review of Economics and Political Science 9(4):382–98. doi: 10.1108/ REPS-11-2022-0094. google scholar
• Ó Tuathail, G. (1999). Understanding critical geopolitics: Geopolitics and risk society. The Journal of Strategic Studies, 22(2–3), 107– 124. doi:10.1080/01402399908437756 google scholar
• Yu, Miaozhi, and Na Wang. 2023. ‘The Influence of Geopolitical Risk on International Direct Investment and Its Countermeasures’. Sustainability 15(3):2522. doi: 10.3390/su15032522. google scholar