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Does geopolitical risk strengthen or depress oil prices and financial liquidity? Evidence from Saudi Arabia

Chi-Wei Su, Khalid Khan (), Ran Tao and Moldovan Nicoleta-Claudia

Energy, 2019, vol. 187, issue C

Abstract: The present study assesses the causality of geopolitical risk (GPR), oil prices (OPs) and financial liquidity by means of wavelet analysis, which aims to investigate whether such relationships support the monetary equilibrium model in Saudi Arabia. Our findings indicate that OP and financial liquidity are related in the time domain when GPR is high. We detect both short- and medium-term correlations among OPs, financial liquidity and GPR in the frequency domain. Additionally, in the absence of GPR, we notice a mid-term correlation between OPs and financial liquidity in the time and frequency domains. Our results support the assumed monetary equilibrium model, which, in turn, is an indication of the fact that OPs are dependent on GPR and that financial liquidity relies on the OP. Such conclusions suggest that the country would benefit from adopting a resource income diversification policy to reduce its impact on OP fluctuations. Additionally, the diversion of unnecessary government expenditures to the investment programs would also represent a beneficial shift in action.

Keywords: Geopolitical risk; Financial liquidity; Oil prices; Wavelet analysis (search for similar items in EconPapers)
JEL-codes: G15 F31 G33 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:energy:v:187:y:2019:i:c:s0360544219316974

DOI: 10.1016/j.energy.2019.116003

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