Geopolitical Risk and Airline Stocks: Driver or Drag?

The aviation industry, as an important pillar of the global economy, is extremely sensitive to geopolitical drivers in its capital market performance. This paper employs the time-varying parameter structural vector autoregression with stochastic volatility (TVP-SV-VAR) to find the dynamic relationship between geopolitical risk (GPR) and airline stocks. Empirical findings validate that the effects of GPR on airline stocks are primarily short-term and with shifting directions. This means that airline shares are extremely responsive to GPR, whose market reactions are a function of shock type as well as prevailing contextual factors. In addition, oil prices (OPs) are employed as a control variable to ascertain their indirect effect on transmitting to airline shares. The results point out that when GPR drives OPs, airline stocks are likely to be under downward pressure; when GPR leads to falling OPs, the downward pressure is alleviated to some extent. Against the backdrop of increasing global geopolitical tensions, the findings of this study are useful to policymakers who want to stabilize the air transport sector, investors who need to optimize asset allocation, and airline companies that intend to optimize their resilience to shock.