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Geopolitical risk and oil price volatility: Evidence from Markov-switching model

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  • Qian, Lihua
  • Zeng, Qing
  • Li, Tao

Abstract

This study explores the predictability of geopolitical risk (GPR) on oil market volatility using autoregressive Markov-regime switching model, and obtains several remarkable findings. First, in-sample results show that high GPR can lead to high fluctuations in oil market. Considering different market states, GPR has different effects. Second, out-of-sample results indicate that GPR has useful information to forecast oil market volatility. Compared to expansions, GPR has a more powerful ability for forecasting oil price volatility during recessions, which are robust to different robustness tests. Third, GPR is effective in long-term forecast horizons. Moreover, geopolitical risk threats and acts are helpful in forecasting oil price volatility, especially geopolitical risk threats.

Suggested Citation

  • Qian, Lihua & Zeng, Qing & Li, Tao, 2022. "Geopolitical risk and oil price volatility: Evidence from Markov-switching model," International Review of Economics & Finance, Elsevier, vol. 81(C), pages 29-38.
    • Handle: RePEc:eee:reveco:v:81:y:2022:i:c:p:29-38
    DOI: 10.1016/j.iref.2022.05.002
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