## 1 Introduction
in [11] examine the impact of terrorist attacks over the period of 36 years on the London and the Athens stock market; two markets of different capitalization and maturity. The empirical findings suggest that there exist no clear and unequivocal picture or pattern over time in terms of abnormal returns in either market. In line with other studies, the effects in both markets generally appear to be transitory with no significant permanent changes. Focusing specifically on the 11 September 2001 terrorist attack and its impact on 53 stock markets, [PERSON] et al. in [12] conclude that in the aftermath of the attacks all stocks exhibit increased volatility and negative returns, but recovered quickly afterwards. In a different perspective, [PERSON] et al. in [13] evaluate whether terrorist attacks forecast gold returns. Using a quantile-predictive-regression (QPR) approach, they find that terrorist attacks have predictive value for the lower and especially for the upper quantiles of the conditional distribution of gold returns. Thus, their empirical results suggest that terrorist attacks are an indicator of abnormal returns but no overall causal linkage that describes the entire distribution can be established. The empirical evidence of a permanent effect of geopolitical risk to exchange rates is also scarce. The International Monetary Fund in [14] states that the terrorist attacks of September 11, 2001 in the United States, had a substantial albeit short-lived negative effect on exchange-rate expectations. [PERSON] et al. in [15] reach to a similar conclusion for the U.K. pound/U.S. dollar exchange rate, using a QPR approach. [PERSON] et al. in [16] find that the profitability of a portfolio, including various currencies stems from the different exposure of each currency to the U.S. dollar. In a similar context, [PERSON] in [17] argues that political risk exerts a statistically significant negative effect on a floating exchange rate, while in [18] the authors claim that the exchange rate markets react only to conflicts and terrorist acts and not to political news of stability and peace. Nevertheless, the reported response is statistically not significant, suggesting that the markets are efficient and that the exchange rate cannot be forecasted based on political events. In this paper, we attempt to forecast a set of financial assets with the geopolitical risk acting as a leading indicator, introducing several innovations. Instead of following the typical approach in the literature, which introduces terrorist attacks and conflicts as a dummy variable to the models, we consider the geopolitical risk indicator of [PERSON] and Iacovello proposed in [19]. This index, apart from being a continuous variable with the obvious advantages in econometric modelling over discrete (dummy) variables, captures a much broader notion of geopolitical risk (GPR). They construct monthly indices of GPR for each country by counting the occurrence of words related to geopolitical tensions in leading international newspapers. The selection of the specific GPR index is motivated by the interesting features that it introduces in comparison with other indices. For instance, several studies measure geopolitical risk based on an index published by a national agency, such as the European Policy Uncertainty Index (EPU) proposed by the European Central Bank (ECB). Nevertheless, this index uses a wide-ranging definition of risk that includes very diverse events, ranging from wars and major economic crises to climate change. In contrast, the GPR index of [PERSON] and [PERSON] focuses specifically on political risk. Moreover, a significant number of researchers exploit market-based indices, such as the VIX, but the construction of a market-based index is based on proprietary data making it hard to replicate (for more details see [PERSON] in Davis (2018)). Moreover, in our paper we depart from developed economies, and search for the effect of the GPR index on 14 developing economies.