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Geopolitical risks and the predictability of regional oil returns and volatility
Author(s) -
Demirer Riza,
Gupta Rangan,
Ji Qiang,
Tiwari Aviral Kumar
Publication year - 2019
Publication title -
opec energy review
Language(s) - English
Resource type - Journals
eISSN - 1753-0237
pISSN - 1753-0229
DOI - 10.1111/opec.12160
Subject(s) - volatility (finance) , predictability , economics , econometrics , granger causality , financial economics , statistics , mathematics
This paper hypothesises that global geopolitical risks (GPRs) can predict oil market return and volatility. For our purpose, we use a k ‐th order non‐parametric causality‐in‐quantile test, applied to a daily data set covering the period of 15 May 1996 to 31 May 2018 of six oil benchmarks (the Nigerian Bonny Light, Brent, Dubai, OPEC Reference Basket (ORB), Tapis and WTI). Our results indicate that the relationship between oil returns and GPRs is highly non‐linear, and hence, linear tests of Granger causality cannot be relied upon. Based on the data‐driven econometric method, we observe that GPRs have predictability for oil returns of the West African Bonny Light, ORB and Tapis, while in terms of volatility, causality is observed for all oil prices barring the case of Dubai. In sum, the impact of GPRs is primarily on volatility of oil markets, but more importantly, the impact of GPRs is not uniform across the oil markets.