Using a news-based gauge of geopolitical risk, we study its role in asset pricing in global emerging markets. We find that changes in risk positively predict future stock returns. The countries with the highest increase in geopolitical uncertainty outperform their counterparts with the lowest change by up to 1% per month. The anomaly is not explained by other established asset pricing effects and remains robust to many considerations. We link the observed phenomenon with investor overreaction to geopolitical news driven by the availability bias.

In this paper, we explore whether economic uncertainty differently affects the default risk of Islamic and conventional banks. Using a sample of 568 banks from 20 countries between 2009 and 2018, we use the World Uncertainty Index (WUI) by Ahir et al. (2018) to conduct a study based on a comparable measure across countries. Our findings indicate that economic uncertainty increases the default risk of conventional banks but does not affect Islamic banks’ default risk. To understand why, we explore the influence of religiosity, institutional factors, and bank-level heterogeneity. We observe that Islamic banks’ default risk is not significantly affected by uncertainty in all types of countries, but such a difference with conventional banks mainly holds for banks with higher income diversification, larger size, and that are publicly traded. Moreover, our findings show that conventional banks suffer more from uncertainty in terms of stability in countries with higher religiosity and with a higher share of profit-loss sharing (PLS) contracts. Our results are robust to alternative estimation techniques to deal with endogeneity and to alternative variable measurements.