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Does geopolitical risk strengthen or depress oil prices and financial liquidity? Evidence from Saudi Arabia

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  • Su, Chi-Wei
  • Khan, Khalid
  • Tao, Ran
  • Nicoleta-Claudia, Moldovan

Abstract

The present study assesses the causality of geopolitical risk (GPR), oil prices (OPs) and financial liquidity by means of wavelet analysis, which aims to investigate whether such relationships support the monetary equilibrium model in Saudi Arabia. Our findings indicate that OP and financial liquidity are related in the time domain when GPR is high. We detect both short- and medium-term correlations among OPs, financial liquidity and GPR in the frequency domain. Additionally, in the absence of GPR, we notice a mid-term correlation between OPs and financial liquidity in the time and frequency domains. Our results support the assumed monetary equilibrium model, which, in turn, is an indication of the fact that OPs are dependent on GPR and that financial liquidity relies on the OP. Such conclusions suggest that the country would benefit from adopting a resource income diversification policy to reduce its impact on OP fluctuations. Additionally, the diversion of unnecessary government expenditures to the investment programs would also represent a beneficial shift in action.

Suggested Citation

  • Su, Chi-Wei & Khan, Khalid & Tao, Ran & Nicoleta-Claudia, Moldovan, 2019. "Does geopolitical risk strengthen or depress oil prices and financial liquidity? Evidence from Saudi Arabia," Energy, Elsevier, vol. 187(C).
    • Handle: RePEc:eee:energy:v:187:y:2019:i:c:s0360544219316974
    DOI: 10.1016/j.energy.2019.116003
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    More about this item

    Keywords

    Geopolitical risk; Financial liquidity; Oil prices; Wavelet analysis;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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