Seismic markets

: geopolitical risks and economic performance in Europe

Abstract

This dissertation investigates the impact of second-moment shocks on real economic performance in the Euro Area. Building on the Common Volatility (COVOL) framework developed by Campos-Martins & Engle (2023), it contrasts volatility-based empirical Global and Regional COVOL with news-based indexes such as Geopolitical Risk, Economic Policy Uncertainty, and World Uncertainty Index. New regional EPU and GPR indexes are constructed to enhance comparability with the Regional COVOL factor. Using quarterly macroeconomic data for 19 Euro Area countries from 2000 to 2023, the analysis finds that second-moment shocks, particularly those identified by lagged Global COVOL, are systematically associated with declines in macroeconomic activity. A one-unit increase in Global COVOL is linked to an approximate 4.5 percentage point decline in Investment growth, a 10-percentage point drop in Consumption growth, and a 3percentage point reduction in Real GDP growth in the subsequent quarter, controlling for time dependence in the data. External trade growth dynamics are also significantly affected: Imports fall by around 11 percentage points and Exports by 10 points, consistent with delayed global supply chain responses. Empirical indexes, particularly Global COVOL, consistently outperform news-based uncertainty measures in explaining macroeconomic variables, due to their faster information incorporation and forward-looking nature. Transmission likely occurs through channels such as real options, smoothen household consumption and trade contagion. The dissertation’s main contribution lies in jointly applying Global and Regional COVOL factors to European aggregate macroeconomic variables. While lagged Global COVOL captures systemic shocks with delayed effects, contemporaneous Regional COVOL adds Eurocentric explanatory power, notably for Industrial Production.

Date of Award	3 Jul 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Susana Campos Martins (Supervisor)