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Geopolitical Risks and Oil Returns Volatility: A GARCH-MIDAS Approach

Author

Listed:
  • Afees A. Salisu

    (Centre for Econometrics & Applied Research, Ibadan, Nigeria; Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

  • Ahamuefula E. Ogbonna

    (Centre for Econometrics & Applied Research, Ibadan, Nigeria)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

Abstract

In this study, we use the GARCH-MIDAS (Generalized Autoregressive Conditional Heteroskedasticity variant of Mixed Data Sampling) model to explore the relationship between geopolitical risks and oil return volatility. We analyze the daily crude oil returns (West Texas Intermediate (WTI and Brent) and five different monthly measures of geopolitical risks - geopolitical oil price risk (GOPRX), its augmented variant (GOPRX_Augmented), and the conventional geopolitical risks (GPR), geopolitical risks-threats (GPRT), and geopolitical risks-attacks (GPRA). Our results show that higher levels of geopolitical risk are linked to lower oil return volatility, which is due to reduced trading during periods of high geopolitical risks. This finding is consistent across the different GPR indices, with evidence of even out-of-sample predictability. We also discuss the practical implications of our findings for practitioners and policymakers.

Suggested Citation

  • Afees A. Salisu & Ahamuefula E. Ogbonna & Rangan Gupta, 2024. "Geopolitical Risks and Oil Returns Volatility: A GARCH-MIDAS Approach," Working Papers 202429, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202429
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    More about this item

    Keywords

    Geopolitical risks; Oil price volatility; GARCH-MIDAS; Forecast evaluation;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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