IMF says geopolitical risks can cause significant stock market corrections

Investing.com -- The International Monetary Fund (IMF) warned on Monday that major geopolitical risks, including trade disputes, can lead to substantial corrections in stock prices.

The IMF’s assertion came in a chapter from its upcoming Global Financial Stability Report.

According to the IMF’s research, significant risk events such as wars, diplomatic tensions, or acts of terrorism can cause stock prices to decrease by an average of 1% monthly across all nations.

For emerging markets, the average decline is steeper, at 2.5%.

The IMF also noted that economic uncertainty amplifies market tail risks, which are the chances of extreme, unexpected losses in an investment portfolio.

This increase in uncertainty can, in turn, heighten the risk of stock market crashes.

In addition to affecting stock prices, the IMF pointed out that escalated geopolitical risks also increase sovereign risk premiums. These are the prices for credit derivatives that offer protection against default.

The IMF warned that these increased risks could have a ripple effect on other economies through trade and financial connections.

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