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Geopolitical Risks and the Predictability of Regional Oil Returns and Volatility

Riza Demirer (), Rangan Gupta (), Qiang Ji () and Aviral Tiwari ()

No 201860, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper hypothesizes that global geopolitical risks (GPRs) can predict oil market return and volatility. For our purpose, we use a k-th order nonparametric causality-inquantiles test, applied to a daily data set covering the period of 15th May, 1996 to 31st May, 2018 of six oil prices (the Nigerian Bonny Light, Brent, Dubai, OPEC, Tapis, and WTI). Our results indicate that the relationship between oil returns and GPRs is highly nonlinear and hence, linear tests of Granger causality cannot be relied upon. Based on the data-driven econometric method, we observe that GPRs have predictability for oil returns of the West African Bonny Light, OPEC and Tapis, while in terms of volatility, causality is observed for all oil prices barring the case of Dubai. In sum, the impact of GPRs is primarily on volatility of oil markets, but more importantly, the impact of GPRs is not uniform across the oil markets.

Keywords: Geopolitical Risks; Oil Prices; Nonparametric Causality-in-Quantiles Test (search for similar items in EconPapers)
JEL-codes: C22 C32 Q41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene
Date: 2018-09
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