Does geopolitical risk improve the directional predictability from oil to stock returns? Evidence from oil-exporting and oil-importing countries

Satish Kumar, Rabeh Khalfaoui and Aviral Tiwari

Resources Policy, 2021, vol. 74, issue C

Abstract: We examine the nonlinear dependence structure between oil (WTI, Brent, Gas oil, Heating oil) and the stock market returns for 14 emerging market indices in oil-exporting and oil-importing countries before and after conditioning upon geopolitical risk using a novel developed quantile dependence approach – cross-quantilogram. When the dependence structure of oil prices with the stock markets of major oil-exporting and oil-importing countries is analyzed without controlling for the geopolitical risk, we do not find any significant dependence. However, after conditioning for geopolitical risk factors, we find the evidence of significant positive (negative) quantile dependence when both oil and stock returns are in the same (either in lower and middle) quantiles of the distribution. Further, the response of oil-exporting equity markets to oil shocks is significantly higher and more persistent than that of oil-importing countries. Results are crucial for diversification benefits and strategy decision making. Since serious geopolitical risk leads to high directional predictability spillover from oil to the stock markets of oil-exporting and oil-importing stock markets, investors and portfolio managers should be cautious when formulating their portfolios and making good hedging strategies. In terms of diversification, it is more suitable for international investors to construct a portfolio of stocks in net oil-importing instead of net oil-exporting countries under geopolitical risk control.

Keywords: Geopolitical risk; WTI; Brent; Stock markets; Cross quantilogram (search for similar items in EconPapers)
JEL-codes: C22 G10 Q41 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Working Paper: Does geopolitical risk improve the directional predictability from oil to stock returns? Evidence from oil-exporting and oil-importing countries (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:74:y:2021:i:c:s0301420721002646

DOI: 10.1016/j.resourpol.2021.102253

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