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Geopolitical risk on energy, agriculture, livestock, precious and industrial metals: New insights from a Markov Switching model

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  • Abid, Ilyes
  • Dhaoui, Abderrazak
  • Kaabia, Olfa
  • Tarchella, Salma

Abstract

This paper delineates a novel approach to analyze the dynamic effects of a Geopolitical Risk (GPR) shock on five types of commodities (energy, precious metals, agriculture, industrial metals, and livestock products). Covering a period of 10 years, from 2013 to 2023, we use a Markov-Switching model with two regimes (low and high volatility). The findings indicate that a Markov-Switching model with a t-distribution for the errors is the most suitable to analyze the impact of GPR shocks on commodity markets. All commodities react to a GPR shock but differently. The energy market is the most reactive market and livestock is the less sensitive one. Our results suggest that investors may want to consider the impact of geopolitical risk on different types of commodities before making investment decisions. Market participants should pay attention to changes in the Geopolitical Risk Index during high volatility regimes to better understand the behavior of commodity markets.

Suggested Citation

  • Abid, Ilyes & Dhaoui, Abderrazak & Kaabia, Olfa & Tarchella, Salma, 2023. "Geopolitical risk on energy, agriculture, livestock, precious and industrial metals: New insights from a Markov Switching model," Resources Policy, Elsevier, vol. 85(PA).
    • Handle: RePEc:eee:jrpoli:v:85:y:2023:i:pa:s0301420723006360
    DOI: 10.1016/j.resourpol.2023.103925
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    Cited by:

    1. Yun-Shi Dai & Peng-Fei Dai & Wei-Xing Zhou, 2024. "The impact of geopolitical risk on the international agricultural market: Empirical analysis based on the GJR-GARCH-MIDAS model," Papers 2404.01641, arXiv.org.
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    3. Polat, Onur & Ertuğrul, Hasan Murat & Sakarya, Burçhan & Akgül, Ali, 2024. "TVP-VAR based time and frequency domain food & energy commodities connectedness an analysis for financial/geopolitical turmoil episodes," Applied Energy, Elsevier, vol. 357(C).

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    More about this item

    Keywords

    Commodity prices; Geopolitical risk; Investors’ sentiment;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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