This paper aims to investigate the asymmetric effects of geopolitical risks (GPRs) on domestic investment in India for the period 1997Q2–2024Q4.
Nonlinear autoregressive distributed lag (NARDL) and multiple threshold nonlinear autoregressive distributed lag (MTNARDL) models are employed to uncover the asymmetric and nonlinear effects of GPRs on investment.
Preliminary investigation using the linear model reveals that a rise in GPRs has a significant negative long-term impact on investment. Results of the NARDL model show that, in the long-run, positive and negative changes in GPRs asymmetrically affect investment, with negative changes having a more pronounced effect than positive ones. The MTNARDL estimates reveal that the investment responds asymmetrically to GPRs of small, moderate, and large degrees. In the long-run, a moderate increase in GPRs has a more pronounced negative impact on investment than both small and large increases, implying a decreasing, U-shaped relationship between GPRs and investment.
The findings have significant policy implications and underscore the need for proactive, prompt policy interventions to mitigate uncertainty, even in moderate geopolitical shifts.
While previous studies have captured the impact of GPRs on investment, this paper addresses the issue of asymmetry and nonlinearity in the effects of GPRs on investment, which has received relatively less attention in existing literature. This study contributed to the emerging literature by examining the asymmetric and nonlinear response of investment to varying magnitudes of GPRs.
