Journal
INTERNATIONAL REVIEW OF ECONOMICS & FINANCE
Volume 81, Issue -, Pages 29-38Publisher
ELSEVIER
DOI: 10.1016/j.iref.2022.05.002
Keywords
Volatility forecasting; Oil market; Geopolitical risk; Regime switching; Out-of-sample statistic test
Categories
Funding
- Social Science Foundation of Jiangsu Province [21EYC015]
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This study explores the predictability of geopolitical risk (GPR) on oil market volatility using autoregressive Markov-regime switching model. The findings suggest that high GPR can lead to high fluctuations in the oil market. GPR has different effects depending on the market states. The study also shows that GPR has useful information to forecast oil market volatility, particularly during recessions.
This study explores the predictability of geopolitical risk (GPR) on oil market volatility using autoregressive Markov-regime switching model, and obtains several remarkable findings. First, in-sample results show that high GPR can lead to high fluctuations in oil market. Considering different market states, GPR has different effects. Second, out-of-sample results indicate that GPR has useful information to forecast oil market volatility. Compared to expansions, GPR has a more powerful ability for forecasting oil price volatility during recessions, which are robust to different robustness tests. Third, GPR is effective in long-term forecast horizons. Moreover, geopolitical risk threats and acts are helpful in forecasting oil price volatility, especially geopolitical risk threats.
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