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Application of Multifractal Analysis in Estimating the Reaction of Energy Markets to Geopolitical Acts and Threats

Faheem Aslam, Paulo Ferreira, Haider Ali and Ana Ercília José
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Faheem Aslam: Department of Management Sciences, COMSATS University, Park Road, Islamabad 45550, Pakistan
Ana Ercília José: Instituto Politécnico de Portalegre, 7300-110 Portalegre, Portugal

Sustainability, 2022, vol. 14, issue 10, 1-23

Abstract: Since the industrial revolution, the geopolitics of energy has been a driver of global prosperity and security, and determines the survival of life on our planet. This study examines the nonlinear structure and multifractal behavior of the cross-correlation between geopolitical risk and energy markets (West Texas Intermediate (WTI), Brent, natural gas and heating oil), using the multifractal detrended cross-correlation analysis. Furthermore, an in-depth analysis reveals different associations of the indices of overall geopolitical risk, geopolitical acts, and geopolitical threats against the four energy products. Based on daily data ranging from 1 January 1985 to 30 August 2021, the findings confirm the presence of nonlinear dependencies, suggesting that geopolitical risk and energy markets are interlinked. Furthermore, significant multifractal characteristics are found and the degree of multifractality is stronger between the overall geopolitical risk and WTI while the lowest degree of multifractality is with Brent. Overall, for the WTI and heating-oil markets, the influence of geopolitical threats is more pronounced rather than their fulfilment. Contrarily, the Brent and natural gas are more correlated to geopolitical acts. Energy products exhibit heterogeneous persistence levels of cross-correlation with all the indicators of geopolitical risk, being more persistent in the case of small fluctuations compared to large fluctuations.

Keywords: geopolitical risk; acts and threats; energy markets; crude oil; natural gas; heating oil; multifractal detrended cross-correlation analysis (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2022
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