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Geopolitical risk and energy price crash risk

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  • Apergis, Nicholas
  • Fahmy, Hany

Abstract

This paper explores the link between geopolitical risks and energy prices crash risk. Studying energy price crashes is important given the sharp fall in oil prices in 2008 and 2014. The analysis focuses on three energy markets: natural gas, oil, and coal, while it employs two measures: the negative coefficient of skewness and the down-to-up volatility, to construct proxies for crash risks. The period of examination is January 2000 to December 2023, whereas that for coal is January 2010 to December 2023. The study employs a modified version of the smooth transition autoregressive model. The results show that, within the modelling framework, coal and oil crash risks are driven by the cyclical behavior of geopolitical acts, whereas natural gas crash risks by geopolitical threats. Causality tests confirm the prediction that geopolitical tensions cause crash risks in energy markets. The results also confirm that the “Economic Activity Channel” is only valid for energy markets driven by geopolitical threats. Energy market regulators should be concerned about crash risks, given that the energy supply shows cyclical boom and bust cycles in prices and production. Crash risks could also potentially cause a fall in investments required to enhance energy efficiency.

Suggested Citation

  • Apergis, Nicholas & Fahmy, Hany, 2024. "Geopolitical risk and energy price crash risk," Energy Economics, Elsevier, vol. 140(C).
    • Handle: RePEc:eee:eneeco:v:140:y:2024:i:c:s0140988324006832
    DOI: 10.1016/j.eneco.2024.107975
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    More about this item

    Keywords

    Energy markets; Crash risk; Economic activity channel; Geopolitical acts; Geopolitical threats;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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