Geopolitical risk trends and crude oil price predictability

Zhikai Zhang, Mengxi He, Yaojie Zhang and Yudong Wang

Energy, 2022, vol. 258, issue C

Abstract: Motivated by recent investigations on the connections between geopolitical risk and crude oil prices, we implement a moving average strategy using the geopolitical risk index to identify risk uptrends and thus forecast real crude oil prices. The empirical results show that geopolitical risk trends can significantly predict oil prices both in- and out-of-sample. From an economic perspective, a mean-variance investor can achieve considerable gains using such a simple conversion of geopolitical risk. Moreover, we find that the geopolitical risk trend contains additional information content beyond financial, commodity, and oil fundamentals. The uptrend of geopolitical risk, which disrupts both economic activity and oil production, imposes stronger shocks on future oil demand than on supply, and thus results in a dramatic decrease in oil prices.

Keywords: Crude oil prices; Geopolitical risk trend; Out-of-sample predictability; Nonlinear relationship; Oil demand (search for similar items in EconPapers)
JEL-codes: C22 C53 G17 Q47 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:energy:v:258:y:2022:i:c:s0360544222017273

DOI: 10.1016/j.energy.2022.124824

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