What are the categories of geopolitical risks that could drive oil prices higher? Acts or threats?

Jamal Bouoiyour (), Refk Selmi, Shawkat Hammoudeh and Mark Wohar ()
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Shawkat Hammoudeh: Bennett S. LeBow College of Business - Department of Economics and International Business - Drexel University

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Abstract: This study characterizes the oil market as a nonlinear-switching phenomenon and examines its dynamics in response to changes in geopolitical risks over low- and high-risk scenarios. We separate the shocks due to geopolitical acts from those due to geopolitical threats to address whether the serious effects of geopolitical risks are mostly due to increased threats of adverse events or to their realization as acts. While we find the acts to generate a positive and strong impact on oil price dynamics, the effect of threats appears to be moderate or non-significant. Imperfect information in the oil price determination, the history of oil supply disruptions emanating from geopolitical events, the continued rise in populism in the world, oil market volatility, multifractility and the time-varying degree of weak-form efficiency have been advanced to explain the unforeseen responses of oil prices to geopolitical threats. To accommodate recent oil-related events, we construct a composite geopolitical risk indicator by accounting for contemporaneous sources of geopolitical risks, namely global trade tensions, US-China relation risks, US-Iran tensions, Saudi Arabia's uncertainty and Venezuela's crisis. The combined effects have an outsized impact on oil prices.

Keywords: Dynamic copula with Markov-switching regimes; New dependence-switching copula; Multifractal detrended fluctuation analysis; Oil market; Geopolitical risks (search for similar items in EconPapers)
Date: 2019-10
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Citations: View citations in EconPapers (119)

Published in Energy Economics, 2019, 84, pp.104523. ⟨10.1016/j.eneco.2019.104523⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02409062

DOI: 10.1016/j.eneco.2019.104523

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