Time-varying geopolitical risk and oil prices
This paper examines the time-varying effect of oil price on geopolitical risk.
Using monthly panel data of 16 countries for the period 1997:M01 – 2020:M02 and employing a varying-coefficient nonparametric panel data model, we find that oil price and its volatility have a time-varying effect on geopolitical risk.
Our results reveal that oil price is negatively associated with geopolitical risk for much of our sample period, albeit the weakening of the effect in recent periods.
In contrast, oil price volatility is positively related with geopolitical risk for most of the sample period under the study. Further, we find a significant degree of heterogeneity in the time-varying country-specific trend functions of geopolitical uncertainty.
Our findings have important implications for policymakers and market participants in managing geopolitical risk.