Financial Transmission of Geopolitical Risk at Different Policy Rates: Evidence From US Markets

This thesis examines whether the financial transmission of geopolitical risk depends on the monetary policy environment in which the shock occurs. Using weekly U.S. data and a nonlinear Interacted Vector Autoregressive model, the analysis compares the effects of the same geopolitical risk shock across High- and Low-rate states. The strongest result emerges for equities: cumulative S&P 500 performance is systematically stronger when the initial policy rate is relatively high, while the subsequent Federal funds rate path is lower. The nominal ten-year Treasury response is less precise and more sensitive to the sample and response horizon. Its decomposition, however, reveals a clearer pattern: real yields decline substantially more in the High-rate state, while stronger inflation compensation progressively offsets this effect. Overall, the results indicate that the financial consequences of geopolitical risk are state dependent and that the monetary environment affects not only the magnitude of the response, but also the balance between the underlying forces driving financial prices.