Geopolitical Shocks and Stock Market Dynamics: A Behavioral–Econophysics Framework

Abstract

This study develops an interdisciplinary framework linking geopolitical shocks to financial markets through macroeconomic fundamentals, perceived risk, and collective sentiment. Perceived risk shifts investors between optimistic and pessimistic states, while imitation can generate bistable sentiment. Energy prices affect fundamental valuations differently in net energy-importing and exporting economies. When markets share the same sensitivities to common risk and sentiment, cross-market comparisons remove common global components and reveal differences in energy exposure. The empirical analysis examines escalating tensions involving Iran in early March 2026. The daily Geopolitical Risk index exceeded four times its February average and Brent crude rose about 34% within a week, yet an event study finds no statistically significant abnormal return of the S&P 500, although the confidence interval does not rule out a sizeable decline; the index fell about 2% in the first week and about 8% by the end of March. A synthetic control constructed from five non-US equity markets shows that US equities outperformed by about 3.5 percentage points over the first two trading days, mainly against oil-importing markets; this gap is stable across fitting windows of 20 to 120 days but becomes small when a 250-day window places almost all weight on Canada, another net oil exporter, and the advantage narrowed sharply at the end of March. A vector autoregression (VAR) indicates that the volatility–return relationship is predominantly contemporaneous. The findings are consistent with, but do not establish, a weak-herding regime and an energy channel moderated by the US net energy position, because collective sentiment and herding are not measured directly. Drawing on feedback dynamics, state transitions, and equilibrium adjustments in physics and chemistry, the framework connects investor behavior with macroeconomic exposure to explain heterogeneous financial responses to geopolitical uncertainty.