Time-Varying Impact of Geopolitical Risks on Oil Prices

Juncal  Cunado; Rangan  Gupta; Chi Keung Lau; Xin Sheng

doi:10.1080/10242694.2018.1563854

Time-Varying Impact of Geopolitical Risks on Oil Prices

Juncal Cunado, Rangan Gupta, Chi Keung Lau, Xin Sheng

Research output: Contribution to journal › Article › peer-review

203 Citations (Scopus)

Abstract

This paper analyses the dynamic impact of geopolitical risks (GPRs) on real oil returns for the period February 1974 to August 2017, using a time-varying parameter structural vector autoregressive (TVP-SVAR) model. Besides the two variables of concern, the model also includes growth in world oil production, global economic activity (to capture oil-demand), and world stock returns. We show that GPRs (based on a tally of newspaper articles covering geopolitical tensions), in general, has a significant negative impact on oil returns, primarily due to the decline in oil demand captured by the global economic activity. Our results, thus, highlight the risk of associating all GPRs with oil supply shocks driven by geopolitical tensions in the Middle East, and hence, ending up suggesting that higher GPRs drive up oil prices.

Original language	English
Pages (from-to)	692-706
Number of pages	15
Journal	Defence and Peace Economics
Volume	31
Issue number	6
Early online date	28 Jan 2019
DOIs	https://doi.org/10.1080/10242694.2018.1563854
Publication status	Published - 17 Aug 2020

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SDG 8 Decent Work and Economic Growth

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Cite this

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title = "Time-Varying Impact of Geopolitical Risks on Oil Prices",

abstract = "This paper analyses the dynamic impact of geopolitical risks (GPRs) on real oil returns for the period February 1974 to August 2017, using a time-varying parameter structural vector autoregressive (TVP-SVAR) model. Besides the two variables of concern, the model also includes growth in world oil production, global economic activity (to capture oil-demand), and world stock returns. We show that GPRs (based on a tally of newspaper articles covering geopolitical tensions), in general, has a significant negative impact on oil returns, primarily due to the decline in oil demand captured by the global economic activity. Our results, thus, highlight the risk of associating all GPRs with oil supply shocks driven by geopolitical tensions in the Middle East, and hence, ending up suggesting that higher GPRs drive up oil prices. ",

keywords = "Oil markets, Geopolitical risks, Time-varying parameter structural vector autoregressive (TVP-SVAR) model, Oil supply, Demand shocks",

author = "Juncal Cunado and Rangan Gupta and Lau, \{Chi Keung\} and Xin Sheng",

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AU - Cunado, Juncal

AU - Gupta, Rangan

AU - Lau, Chi Keung

AU - Sheng, Xin

PY - 2020/8/17

Y1 - 2020/8/17

N2 - This paper analyses the dynamic impact of geopolitical risks (GPRs) on real oil returns for the period February 1974 to August 2017, using a time-varying parameter structural vector autoregressive (TVP-SVAR) model. Besides the two variables of concern, the model also includes growth in world oil production, global economic activity (to capture oil-demand), and world stock returns. We show that GPRs (based on a tally of newspaper articles covering geopolitical tensions), in general, has a significant negative impact on oil returns, primarily due to the decline in oil demand captured by the global economic activity. Our results, thus, highlight the risk of associating all GPRs with oil supply shocks driven by geopolitical tensions in the Middle East, and hence, ending up suggesting that higher GPRs drive up oil prices.

AB - This paper analyses the dynamic impact of geopolitical risks (GPRs) on real oil returns for the period February 1974 to August 2017, using a time-varying parameter structural vector autoregressive (TVP-SVAR) model. Besides the two variables of concern, the model also includes growth in world oil production, global economic activity (to capture oil-demand), and world stock returns. We show that GPRs (based on a tally of newspaper articles covering geopolitical tensions), in general, has a significant negative impact on oil returns, primarily due to the decline in oil demand captured by the global economic activity. Our results, thus, highlight the risk of associating all GPRs with oil supply shocks driven by geopolitical tensions in the Middle East, and hence, ending up suggesting that higher GPRs drive up oil prices.

KW - Oil markets

KW - Geopolitical risks

KW - Time-varying parameter structural vector autoregressive (TVP-SVAR) model

KW - Oil supply

KW - Demand shocks

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DO - 10.1080/10242694.2018.1563854

M3 - Article

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SP - 692

EP - 706

JO - Defence and Peace Economics

JF - Defence and Peace Economics

IS - 6

ER -

Time-Varying Impact of Geopolitical Risks on Oil Prices

Abstract

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