Volatility Modeling of the Impact of Geopolitical Risk on Commodity Markets

Letife Özdemir (), Necmiye Serap Vurur, Ercan Ozen, Beata Świecka and Simon Grima ()
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Letife Özdemir: Department of International Trade and Finance, Faculty of Economics and Administrative Sciences, Afyon Kocatepe University, 03200 Afyonkarahisar, Turkey
Necmiye Serap Vurur: Department of Accounting and Finance, Bolvadin Faculty of Applied Sciences, Afyon Kocatepe University, 03100 Afyonkarahisar, Turkey
Ercan Ozen: Department of Finance and Banking, University of Uşak, 64000 Uşak, Turkey
Beata Świecka: Institute of Economics and Finance, University of Szczecin, 71-001 Szczecin, Poland
Simon Grima: Department of Insurance and Risk Management, Faculty of Economics, Management and Accountancy, University of Malta, MSD 2080 Msida, Malta

Economies, 2025, vol. 13, issue 4, 1-32

Abstract: This study analyses the impact of the Geopolitical Risk Index (GPR) on the volatility of commodity futures returns from 4 January 2010 to 30 June 2023, using Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) models. It expands the research scope to include precious metals, agricultural products, energy, and industrial metals. The study differentiates between the impacts of geopolitical threat events and actions using GPRACT and GPRTHREAT indicators. Findings reveal that negative geopolitical shocks increase commodity returns’ volatility more than positive shocks. Specifically, gold, silver, and natural gas are negatively affected, while wheat, corn, soybeans, cotton, zinc, nickel, lead, WTI oil, and Brent oil experience positive effects. Platinum, cocoa, coffee, and copper show no significant impact. These insights highlight the importance of geopolitical risks on commodity market volatility and returns, aiding in risk management and portfolio diversification. Policymakers, financial market stakeholders, and investors can leverage these findings to better understand the GPR’s relationship with commodity markets and develop effective strategies.

Keywords: geopolitical risk; commodity; EGARCH (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2025
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