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What are the categories of geopolitical risks that could drive oil prices higher? Acts or threats?

Author

Listed:
  • Jamal Bouoiyour

    (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour)

  • Refk Selmi

    (IRMAPE - Institut de Recherche en Management et Pays Emergents - ESC PAU - Ecole Supérieure de Commerce, Pau Business School, CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour)

  • Shawkat Hammoudeh

    (Bennett S. LeBow College of Business - Department of Economics and International Business - Drexel University)

  • Mark E Wohar

    (University of Nebraska Omaha - University of Nebraska System)

Abstract

This study characterizes the oil market as a nonlinear-switching phenomenon and examines its dynamics in response to changes in geopolitical risks over low- and high-risk scenarios. We separate the shocks due to geopolitical acts from those due to geopolitical threats to address whether the serious effects of geopolitical risks are mostly due to increased threats of adverse events or to their realization as acts. While we find the acts to generate a positive and strong impact on oil price dynamics, the effect of threats appears to be moderate or non-significant. Imperfect information in the oil price determination, the history of oil supply disruptions emanating from geopolitical events, the continued rise in populism in the world, oil market volatility, multifractility and the time-varying degree of weak-form efficiency have been advanced to explain the unforeseen responses of oil prices to geopolitical threats. To accommodate recent oil-related events, we construct a composite geopolitical risk indicator by accounting for contemporaneous sources of geopolitical risks, namely global trade tensions, US-China relation risks, US-Iran tensions, Saudi Arabia's uncertainty and Venezuela's crisis. The combined effects have an outsized impact on oil prices.

Suggested Citation

  • Jamal Bouoiyour & Refk Selmi & Shawkat Hammoudeh & Mark E Wohar, 2019. "What are the categories of geopolitical risks that could drive oil prices higher? Acts or threats?," Post-Print hal-02409062, HAL.
    • Handle: RePEc:hal:journl:hal-02409062
    DOI: 10.1016/j.eneco.2019.104523
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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