Abstract
This paper uses the generalized VAR framework to study the asymmetric spillover between geopolitical risk and oil price volatility for six major regions in the world. Based on the geopolitical risk spillovers, we find that developed countries are net risk transmitters while emerging countries are relatively net receivers. Dynamic patterns uncover strong spillovers under historical events like the two Gulf Wars, Arab Spring, and trading conflicts, and the Middle East has high risk exposure for oil volatility. From an asymmetric analysis, we obtain significantly strong spillover effects, bidirectionally, between geopolitical tensions and bad oil volatility. However, extreme geopolitical risk tends to contribute substantially to good oil volatility. Furthermore, we observe the risk-volatility connectedness in the Middle East is higher than in other regions, whereas the geopolitical risk in North America receives a relatively low spillover from oil.
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