Do stock markets price words or actions? President Donald Trump´s geopolitical signals and conflict risk

Abstract

Geopolitical tensions and military threats increasingly shape global financial markets. Using geopolitical threat signals associated with President Donald Trump, we distinguish between threats that later escalated into military action and those that did not. We find a clear asymmetry in stock market responses. Threats that do not materialize are associated with positive abnormal returns, whereas threats followed by military escalation generate weaker or negative effects, particularly in Latin American stock markets, while responses in G7 economies remain muted. These findings suggest that markets price not only geopolitical threats themselves, but also their perceived credibility and eventual realization, highlighting the role of credibility in asset pricing.