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Volatility jumps: The role of geopolitical risks

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  • Gkillas, Konstantinos
  • Gupta, Rangan
  • Wohar, Mark E.

Abstract

In this paper we analyse the role of a news-based index of geopolitical risks (GPRs), in predicting volatility jumps in the Dow Jones Industrial Average (DJIA) over the monthly period of 1899:01 to 2017:12, with the jumps having been computed based on daily data over the same period. Standard linear Granger causality test failed to detect any evidence of GPRs causing volatility jumps. But given strong evidence of nonlinearity and structural breaks between jumps and GPRs, we next used a nonparametric causality-in-quantiles test, since the linear model is misspecified. Using this data-driven robust approach we were able to detect overwhelming evidence of GPRs predicting volatility jumps of the DJIA over its entire conditional distribution. In addition, a cross-quantilogram analysis shows that what matters most for increases in volatility jumps are relatively higher GPRs than lower values of the same.

Suggested Citation

  • Gkillas, Konstantinos & Gupta, Rangan & Wohar, Mark E., 2018. "Volatility jumps: The role of geopolitical risks," Finance Research Letters, Elsevier, vol. 27(C), pages 247-258.
  • Handle: RePEc:eee:finlet:v:27:y:2018:i:c:p:247-258
    DOI: 10.1016/j.frl.2018.03.014
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    Cited by:

    1. Gkillas, Konstantinos & Gupta, Rangan & Pierdzioch, Christian, 2020. "Forecasting realized oil-price volatility: The role of financial stress and asymmetric loss," Journal of International Money and Finance, Elsevier, vol. 104(C).
    2. Besma Hkiri & Juncal Cunado & Mehmet Balcilar & Rangan Gupta, 2019. "Time-Varying Relationship between Conventional and Unconventional Monetary Policies and Risk Aversion: International Evidence from Time- and Frequency-Domains," Working Papers 201965, University of Pretoria, Department of Economics.
    3. Rangan Gupta & Chi Keung Marco Lau & Seong-Min Yoon, 2019. "OPEC News Announcement Effect on Volatility in the Crude Oil Market: A Reconsideration," Advances in Decision Sciences, Asia University, Taiwan, vol. 23(4), pages 1-23, December.
    4. Elie Bouri & Rangan Gupta & Xuan Vinh Vo, 2020. "Jumps in Geopolitical Risk and the Cryptocurrency Market: The Singularity of Bitcoin," Working Papers 202015, University of Pretoria, Department of Economics.
    5. Zeng, Sheng & Liu, Xinchun & Li, Xiafei & Wei, Qi & Shang, Yue, 2019. "Information dominance among hedging assets: Evidence from return and volatility directional spillovers in time and frequency domains," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 536(C).
    6. Aysan, Ahmet Faruk & Demir, Ender & Gozgor, Giray & Lau, Chi Keung Marco, 2019. "Effects of the geopolitical risks on Bitcoin returns and volatility," Research in International Business and Finance, Elsevier, vol. 47(C), pages 511-518.
    7. Yue Liu & Hao Dong & Pierre Failler, 2019. "The Oil Market Reactions to OPEC’s Announcements," Energies, MDPI, Open Access Journal, vol. 12(17), pages 1-15, August.
    8. Konstantinos Gkillas & Rangan Gupta & Mark E. Wohar, 2020. "Oil shocks and volatility jumps," Review of Quantitative Finance and Accounting, Springer, vol. 54(1), pages 247-272, January.
    9. Liu, Jing & Ma, Feng & Tang, Yingkai & Zhang, Yaojie, 2019. "Geopolitical risk and oil volatility: A new insight," Energy Economics, Elsevier, vol. 84(C).
    10. Konstantinos Gkillas & Rangan Gupta & Chi Keung Marco Lau & Tahir Suleman, 2018. "Jumps Beyond the Realms of Cricket: India’s Performance in One Day Internationals and Stock Market Movements," Working Papers 201871, University of Pretoria, Department of Economics.
    11. Lee, Chien-Chiang & Chen, Mei-Ping, 2020. "Do natural disasters and geopolitical risks matter for cross-border country exchange-traded fund returns?," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    12. Konstantinos Gkillas & Dimitrios Vortelinos & Christos Floros & Athanasios Tsagkanos, 2019. "Economic News Releases and Financial Markets in South Africa," Economies, MDPI, Open Access Journal, vol. 7(4), pages 1-13, November.
    13. Manabu Asai & Rangan Gupta & Michael McAleer, 2019. "Forecasting Volatility and Co-volatility of Crude Oil and Gold Futures: Effects of Leverage, Jumps, Spillovers, and Geopolitical Risks," Working Papers 201951, University of Pretoria, Department of Economics.

    More about this item

    Keywords

    Stock market volatility jumps; Geopolitical risks;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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