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

What are the categories of geopolitical risks that could drive oil prices higher? Acts or threats?
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.
- Loughborough University United Kingdom
- Drexel University United States
- University of Nebraska at Omaha United States
- Drexel University United States
- University of Nebraska at Omaha United States
New dependence-switching copula, Geopolitical risks, Multifractal detrended fluctuation analysis, [SHS.ECO]Humanities and Social Sciences/Economics and Finance, Dynamic copula with Markov-switching regimes, JEL: G - Financial Economics/G.G1 - General Financial Markets/G.G1.G11 - Portfolio Choice • Investment Decisions, JEL: G - Financial Economics/G.G1 - General Financial Markets/G.G1.G15 - International Financial Markets, Oil market, JEL: C - Mathematical and Quantitative Methods/C.C5 - Econometric Modeling/C.C5.C58 - Financial Econometrics, [SHS.ECO] Humanities and Social Sciences/Economics and Finance, jel: jel:G - Financial Economics/G.G1 - General Financial Markets/G.G1.G15 - International Financial Markets, jel: jel:G - Financial Economics/G.G1 - General Financial Markets/G.G1.G11 - Portfolio Choice • Investment Decisions, jel: jel:C - Mathematical and Quantitative Methods/C.C5 - Econometric Modeling/C.C5.C58 - Financial Econometrics
New dependence-switching copula, Geopolitical risks, Multifractal detrended fluctuation analysis, [SHS.ECO]Humanities and Social Sciences/Economics and Finance, Dynamic copula with Markov-switching regimes, JEL: G - Financial Economics/G.G1 - General Financial Markets/G.G1.G11 - Portfolio Choice • Investment Decisions, JEL: G - Financial Economics/G.G1 - General Financial Markets/G.G1.G15 - International Financial Markets, Oil market, JEL: C - Mathematical and Quantitative Methods/C.C5 - Econometric Modeling/C.C5.C58 - Financial Econometrics, [SHS.ECO] Humanities and Social Sciences/Economics and Finance, jel: jel:G - Financial Economics/G.G1 - General Financial Markets/G.G1.G15 - International Financial Markets, jel: jel:G - Financial Economics/G.G1 - General Financial Markets/G.G1.G11 - Portfolio Choice • Investment Decisions, jel: jel:C - Mathematical and Quantitative Methods/C.C5 - Econometric Modeling/C.C5.C58 - Financial Econometrics
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