Abstract
This study aims to examine the stability of the lead-lag relationship between geopolitical risk and crude oil prices. To this end, a Granger causality test is conducted, using a lag-augmented vector autoregression model and monthly data from 1997 to 2022. The results show a significant full-sample bilateral Granger causality. The recursive expanding window method and the asymmetric decomposition technique are also used to find that the relationship between geopolitical risk and crude oil prices is complex and time-varying, with asymmetry. The wavelet decomposition analysis shows that this complexity is mainly due to short-term structural changes. When these fluctuations are excluded, the impact of geopolitical risk on crude oil prices (and vice versa) no longer shows time-varying characteristics or asymmetry. This stable relationship provides a new perspective for predicting crude oil prices in the face of geopolitical risk. Given the importance of both geopolitical risk and crude oil prices in the fields of economy, finance, and politics, this research and the accompanying results have implications for informed decision-making by investors and policy makers.
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