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Transmission mechanisms of geopolitical risks to the crude oil market——A pioneering two-stage geopolitical risk analysis approach

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  • Jiao, Jing-Wen
  • Yin, Jun-Ping
  • Xu, Ping-Feng
  • Zhang, Juan
  • Liu, Yuan

Abstract

As an exogenous risk, geopolitical risk drives oil price volatility indirectly through multiple factors, which are ignored by most studies. This paper establishes a two-stage approach for the first time to analyze the indirect geopolitical risk transmission mechanisms, and applies the time-varying parametric vector autoregressive (TVPVAR) model to illustrate how geopolitical risk affects oil prices via different transmission paths including micro media (supply, demand, inventories, speculative behaviors) and macro media (global economic activities). Oil prices do not always rise in response to geopolitical events, sometimes even varies to the opposite direction, a phenomenon that can be well explained and modeled by the transmission mechanisms we developed. In this paper, we have identified two clear and unique geopolitical transmission paths to enhance energy-related decisions. Aside from the conventional economic phenomenon of geopolitical risks affecting oil prices through supply and demand behaviors, speculative behaviors increase during the period of high geopolitical risk, and the impact of speculative activity on oil prices is prominent. In addition, the most influential path is that geopolitical factors can indirectly impact oil prices by influencing economic fluctuations, which provides powerful and empirical supports for energy-related financial decisions and policy implications.

Suggested Citation

  • Jiao, Jing-Wen & Yin, Jun-Ping & Xu, Ping-Feng & Zhang, Juan & Liu, Yuan, 2023. "Transmission mechanisms of geopolitical risks to the crude oil market——A pioneering two-stage geopolitical risk analysis approach," Energy, Elsevier, vol. 283(C).
    • Handle: RePEc:eee:energy:v:283:y:2023:i:c:s0360544223018431
    DOI: 10.1016/j.energy.2023.128449
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    8. Li, Xiafei & Yang, Shuangpeng & Luo, Keyu & Liang, Chao, 2024. "Spillover relationships between international crude oil markets and global energy stock markets under the influence of geopolitical risks: New evidence," International Review of Financial Analysis, Elsevier, vol. 96(PA).
    9. Qiang Wang & Xinhua Wang & Rongrong Li, 2024. "Geopolitical risks and energy transition: the impact of environmental regulation and green innovation," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-22, December.
    10. Yang, Tianle & Dong, Qingyuan & Du, Min & Du, Qunyang, 2023. "Geopolitical risks, oil price shocks and inflation: Evidence from a TVP–SV–VAR approach," Energy Economics, Elsevier, vol. 127(PB).
    11. Xu, Shuanglei & Deng, Youyi & Nepal, Rabindra & Jamasb, Tooraj, 2024. "Geopolitical Conflict and Risk and the EU Energy Trading: A Dynamic Evolutionary Networks Analysis," Working Papers 14-2024, Copenhagen Business School, Department of Economics.
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