Time-Varying Impact of Geopolitical Risks on Oil Prices

By Juncal Cunado, Rangan Gupta, Chi Keung Marco Lau, X. Sheng. Defence and Peace Economics, 2020

231 citations recorded by the source corpus.

ABSTRACT This paper analyses the dynamic impact of geopolitical risks (GPRs) on real oil returns for the period February 1974 to August 2017, using a time-varying parameter structural vector autoregressive (TVP-SVAR) model. Besides the two variables of concern, the model also includes growth in world oil production, global economic activity (to capture oil-demand), and world stock returns. We show that GPRs (based on a tally of newspaper articles covering geopolitical tensions), in general, has a significant negative impact on oil returns, primarily due to the decline in oil demand captured by the global economic activity. Our results, thus, highlight the risk of associating all GPRs with oil supply shocks driven by geopolitical tensions in the Middle East, and hence, ending up suggesting that higher GPRs drive up oil prices.

Subfields: Economics and Econometrics, General Energy

View Paper: https://www.semanticscholar.org/paper/e0406b2a165757d0f2bcfb39fd9accd1eda73f96