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Time-Varying Impact of Geopolitical Risks on Oil Prices

Author

Listed:
  • Juncal Cunado

    (University of Navarra, School of Economics, Pamplona, Spain)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

  • Chi Keung Marco Lau

    (Huddersfield Business School, University of Huddersfield, Huddersfield, United Kingdom)

  • Xin Sheng

    (Huddersfield Business School, University of Huddersfield, Huddersfield, United Kingdom)

Abstract

This paper analyses the dynamic impact of geopolitical risks (GPRs) on real oil returns for the period February 1974 to August 2017, using a time-varying parameter structural vector autoregressive (TVP-SVAR) model. Besides the two variables of concern, the model also includes growth in world oil production, global economic activity (to capture oil-demand), and world stock returns. We show that GPRs (based on a tally of newspaper articles covering geopolitical tensions), in general, has a significant negative impact on oil returns, primarily due to the decline in oil demand captured by the global economic activity. Our results, thus, highlight the risk of associating all GPRs with oil supply shocks driven by geopolitical tensions in the Middle East, and hence, ending up suggesting that higher GPRs drive up oil prices.

Suggested Citation

  • Juncal Cunado & Rangan Gupta & Chi Keung Marco Lau & Xin Sheng, 2018. "Time-Varying Impact of Geopolitical Risks on Oil Prices," Working Papers 201841, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201841
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    as
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    More about this item

    Keywords

    Oil markets; geopolitical risks; time-varying parameter structural vector autoregressive (TVP-SVAR) model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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