Russo-British Geopolitical Conflict and Pound Sterling Volatility: Estimation Using an EGARCH-X Model

Abstract

This article examines the influence of the recent Russo-British geopolitical conflict on the volatility of sterling returns, utilizing an Exponential Generalised Autoregressive Conditional Heteroskedasticity model with exogenous variables (EGARCH-X) under a generalised error distribution (GED), which incorporates both geopolitical and macroeconomic-financial exogenous factors. The findings reveal a pronounced negative asymmetry, indicating that adverse shocks substantially heighten sterling volatility. Although the variable representing the geopolitical event of May 3, 2025, between Russia and the United Kingdom is statistically insignificant under the GED specification, global geopolitical risk exerts a moderately significant effect. This divergence suggests that markets respond more sharply to systemic tensions than isolated bilateral disputes. From an economic perspective, Sterling’s heightened sensitivity to oil prices and Gilt yields reflects the United Kingdom’s structural vulnerabilities regarding energy dependence and fiscal sustainability. Overall, the observed volatility appears to be primarily driven by global exogenous shocks rather than discrete events, underscoring the growing importance of risk perceptions in an increasingly interconnected international environment.