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Nonlinear dynamic correlation between geopolitical risk and oil prices: A study based on high-frequency data

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  • Huang, Jianbai
  • Ding, Qian
  • Zhang, Hongwei
  • Guo, Yaoqi
  • Suleman, Muhammad Tahir

Abstract

This study investigates the nonlinear dynamic correlations between geopolitical risk (GPR) and oil prices using nonlinear Granger causality and DCC-MVGARCH methods based on high-frequency data. The relationship between GPR and oil prices is found to have a complex nonlinear relationship rather than a simple linear one. Further, a bidirectional nonlinear Granger causality is found to consistently exist between GPR and oil volatility across different components of realized volatility. In terms of returns, GPR has relatively weak unidirectional nonlinear Granger causation with oil returns. The dynamic correlation analysis shows that GPR mainly affects oil volatility rather than returns. Moreover, GPR mainly affects oil volatility through the jump component of the oil market after the financial crisis, and there is a strong positive correlation between GPR and volatility jumps. Our findings innovatively suggest that GPR can potentially be utilized to improve models of volatility jumps and provide reference for investors and price analysts in oil markets who want to design sensible risk-management strategies.

Suggested Citation

  • Huang, Jianbai & Ding, Qian & Zhang, Hongwei & Guo, Yaoqi & Suleman, Muhammad Tahir, 2021. "Nonlinear dynamic correlation between geopolitical risk and oil prices: A study based on high-frequency data," Research in International Business and Finance, Elsevier, vol. 56(C).
    • Handle: RePEc:eee:riibaf:v:56:y:2021:i:c:s0275531920309788
    DOI: 10.1016/j.ribaf.2020.101370
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    Cited by:

    1. Zhang, Zhikai & Wang, Yudong & Xiao, Jihong & Zhang, Yaojie, 2023. "Not all geopolitical shocks are alike: Identifying price dynamics in the crude oil market under tensions," Resources Policy, Elsevier, vol. 80(C).
    2. Faheem Aslam & Paulo Ferreira & Haider Ali & Ana Ercília José, 2022. "Application of Multifractal Analysis in Estimating the Reaction of Energy Markets to Geopolitical Acts and Threats," Sustainability, MDPI, vol. 14(10), pages 1-23, May.
    3. Ding, Qian & Huang, Jianbai & Chen, Jinyu, 2021. "Dynamic and frequency-domain risk spillovers among oil, gold, and foreign exchange markets: Evidence from implied volatility," Energy Economics, Elsevier, vol. 102(C).
    4. Ding, Qian & Huang, Jianbai & Gao, Wang & Zhang, Hongwei, 2022. "Does political risk matter for gold market fluctuations? A structural VAR analysis," Research in International Business and Finance, Elsevier, vol. 60(C).
    5. Khan, Nasir & Saleem, Asima & Ozkan, Oktay, 2023. "Do geopolitical oil price risk influence stock market returns and volatility of Pakistan: Evidence from novel non-parametric quantile causality approach," Resources Policy, Elsevier, vol. 81(C).
    6. Liu, Zhenhua & Shi, Xunpeng & Zhai, Pengxiang & Wu, Shan & Ding, Zhihua & Zhou, Yuqin, 2021. "Tail risk connectedness in the oil-stock nexus: Evidence from a novel quantile spillover approach," Resources Policy, Elsevier, vol. 74(C).
    7. Yan Ding & Yue Liu & Pierre Failler, 2022. "The Impact of Uncertainties on Crude Oil Prices: Based on a Quantile-on-Quantile Method," Energies, MDPI, vol. 15(10), pages 1-35, May.
    8. Wu, Jie & Zhao, Ruizeng & Sun, Jiasen & Zhou, Xuewei, 2023. "Impact of geopolitical risks on oil price fluctuations: Based on GARCH-MIDAS model," Resources Policy, Elsevier, vol. 85(PB).
    9. Zhao, Jing, 2023. "Time-varying impact of geopolitical risk on natural resources prices: Evidence from the hybrid TVP-VAR model with large system," Resources Policy, Elsevier, vol. 82(C).
    10. Ivanovski, Kris & Hailemariam, Abebe, 2022. "Time-varying geopolitical risk and oil prices," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 206-221.
    11. Nonejad, Nima, 2022. "Forecasting crude oil price volatility out-of-sample using news-based geopolitical risk index: What forms of nonlinearity help improve forecast accuracy the most?," Finance Research Letters, Elsevier, vol. 46(PA).
    12. Shah, Muhammad Ibrahim & Foglia, Matteo & Shahzad, Umer & Fareed, Zeeshan, 2022. "Green innovation, resource price and carbon emissions during the COVID-19 times: New findings from wavelet local multiple correlation analysis," Technological Forecasting and Social Change, Elsevier, vol. 184(C).
    13. Cheng, Sheng & Han, Lingyu & Cao, Yan & Jiang, Qisheng & Liang, Ruibin, 2022. "Gold-oil dynamic relationship and the asymmetric role of geopolitical risks: Evidence from Bayesian pdBEKK-GARCH with regime switching," Resources Policy, Elsevier, vol. 78(C).
    14. Zhang, Zhikai & He, Mengxi & Zhang, Yaojie & Wang, Yudong, 2022. "Geopolitical risk trends and crude oil price predictability," Energy, Elsevier, vol. 258(C).
    15. Li, Sufang & Tu, Dalun & Zeng, Yan & Gong, Chenggang & Yuan, Di, 2022. "Does geopolitical risk matter in crude oil and stock markets? Evidence from disaggregated data," Energy Economics, Elsevier, vol. 113(C).
    16. Tin Hei Alpha Yuen & Wai Kee Thomas Yuen, 2022. "Relationship Between Geopolitical Risk In Major Oil Producing Countries and Oil Price," International Journal of Energy Economics and Policy, Econjournals, vol. 12(5), pages 117-123, September.
    17. Ren, Xiaohang & An, Yaning & Jin, Chenglu, 2023. "The asymmetric effect of geopolitical risk on China's crude oil prices: New evidence from a QARDL approach," Finance Research Letters, Elsevier, vol. 53(C).
    18. Roy, Archi & Soni, Anchal & Deb, Soudeep, 2023. "A wavelet-based methodology to compare the impact of pandemic versus Russia–Ukraine conflict on crude oil sector and its interconnectedness with other energy and non-energy markets," Energy Economics, Elsevier, vol. 124(C).
    19. He, Zhifang, 2023. "Geopolitical risks and investor sentiment: Causality and TVP-VAR analysis," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).
    20. Li, Yingli & Huang, Jianbai & Gao, Wang & Zhang, Hongwei, 2021. "Analyzing the time-frequency connectedness among oil, gold prices and BRICS geopolitical risks," Resources Policy, Elsevier, vol. 73(C).
    21. Choi, Sun-Yong, 2022. "Evidence from a multiple and partial wavelet analysis on the impact of geopolitical concerns on stock markets in North-East Asian countries," Finance Research Letters, Elsevier, vol. 46(PB).
    22. Gong, Xiao-Li & Feng, Yong-Kang & Liu, Jian-Min & Xiong, Xiong, 2023. "Study on international energy market and geopolitical risk contagion based on complex network," Resources Policy, Elsevier, vol. 82(C).
    23. Zhang, Yulian & Hamori, Shigeyuki, 2022. "A connectedness analysis among BRICS’s geopolitical risks and the US macroeconomy," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 182-203.
    24. Bouteska, Ahmed & Hajek, Petr & Fisher, Ben & Abedin, Mohammad Zoynul, 2023. "Nonlinearity in forecasting energy commodity prices: Evidence from a focused time-delayed neural network," Research in International Business and Finance, Elsevier, vol. 64(C).

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