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Can geopolitical risk stably predict crude oil prices? A multi-dimensional perspective

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  • Li, Xin
  • Umar, Muhammad
  • Zhu, Cun-Bin
  • Oprean-Stan, Camelia

Abstract

This study aims to examine the stability of the lead-lag relationship between geopolitical risk and crude oil prices. To this end, a Granger causality test is conducted, using a lag-augmented vector autoregression model and monthly data from 1997 to 2022. The results show a significant full-sample bilateral Granger causality. The recursive expanding window method and the asymmetric decomposition technique are also used to find that the relationship between geopolitical risk and crude oil prices is complex and time-varying, with asymmetry. The wavelet decomposition analysis shows that this complexity is mainly due to short-term structural changes. When these fluctuations are excluded, the impact of geopolitical risk on crude oil prices (and vice versa) no longer shows time-varying characteristics or asymmetry. This stable relationship provides a new perspective for predicting crude oil prices in the face of geopolitical risk. Given the importance of both geopolitical risk and crude oil prices in the fields of economy, finance, and politics, this research and the accompanying results have implications for informed decision-making by investors and policy makers.

Suggested Citation

  • Li, Xin & Umar, Muhammad & Zhu, Cun-Bin & Oprean-Stan, Camelia, 2023. "Can geopolitical risk stably predict crude oil prices? A multi-dimensional perspective," Resources Policy, Elsevier, vol. 85(PA).
    • Handle: RePEc:eee:jrpoli:v:85:y:2023:i:pa:s0301420723004968
    DOI: 10.1016/j.resourpol.2023.103785
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    More about this item

    Keywords

    Geopolitical risk; Crude oil price; Time-varying; Asymmetry; Wavelet decomposition;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • P28 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Natural Resources; Environment

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