Geopolitical Risks and Oil Returns Volatility: A GARCH-MIDAS Approach

Afees Salisu, Ahamuefula Ogbonna and Rangan Gupta

No 202429, Working Papers from University of Pretoria, Department of Economics

Abstract: In this study, we use the GARCH-MIDAS (Generalized Autoregressive Conditional Heteroskedasticity variant of Mixed Data Sampling) model to explore the relationship between geopolitical risks and oil return volatility. We analyze the daily crude oil returns (West Texas Intermediate (WTI and Brent) and five different monthly measures of geopolitical risks - geopolitical oil price risk (GOPRX), its augmented variant (GOPRX_Augmented), and the conventional geopolitical risks (GPR), geopolitical risks-threats (GPRT), and geopolitical risks-attacks (GPRA). Our results show that higher levels of geopolitical risk are linked to lower oil return volatility, which is due to reduced trading during periods of high geopolitical risks. This finding is consistent across the different GPR indices, with evidence of even out-of-sample predictability. We also discuss the practical implications of our findings for practitioners and policymakers.

Keywords: Geopolitical risks; Oil price volatility; GARCH-MIDAS; Forecast evaluation (search for similar items in EconPapers)
JEL-codes: C53 Q41 Q47 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2024-06
New Economics Papers: this item is included in nep-ene and nep-rmg
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