Geopolitical Risk and Crude Oil Volatility Transmission in Commodity Markets
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2024-07-11
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en
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This research studies the effect that Geopolitical Risk (GPR) has on crude oil volatility via DCC-GARCH models. This study aims to find out whether GPR-induced crude oil volatility leads to volatility transmission in commodity markets. The commodities studied in this research are natural gas, copper, wheat, corn, and gold. Firstly, the effect of GPR on crude oil and thereby the other commodities is studied in a DCC-GARCH (2,2) model with just the commodities and GPR. Afterwards, this study aims to isolate the true effect of GPR on crude oil by adding a wide range of macroeconomic control variables into the model. These variables are Economic Policy Uncertainty (EPU), the volatility index (VIX), Moody’s default spread (DEF), the Economic Surprise Index (ESI), and the self-created surprise index of the Baltic Dry Index (BDI).
This study has found that GPR indeed influences crude oil volatility, and that this GPR-induced crude oil volatility leads to volatility transmission towards other commodities. These findings are robust for other specifications of GPR provided by Caldara and Iacoviello (2022). This study has, however, also found that the fracking boom significantly changed the influence of GPR and thereby the volatility transmission patterns in commodity markets.
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Faculteit der Managementwetenschappen