Can geopolitical risks impact the long-run correlation between crude oil and clean energy markets? Evidence from a regime-switching analysis

Abstract

The increasingly volatile and complex geopolitical landscape has impacted the global energy market more frequently, posing serious challenges to the global energy low-carbon transition strategy. However, the heterogeneity of the impact of geopolitical risks (GPR) on the dynamic correlation between oil and clean energy across various market conditions and sub-industries of clean energy remains distinct. To address this gap, this paper combines a dynamic conditional correlation with the mixed data sampling (DCC-MIDAS) model and the Markov regime-switching model to investigate the influence of GPR on the correlation between oil and clean energy, particularly in diverse market conditions. Empirical findings reveal that the impacts of GPR on the long-run correlations of oil-clean energy vary across different market regimes, both in terms of the overall market and industry sectors. Specifically, GPR negatively affects the oil-clean energy correlation with stronger effects in the low-correlation regime. In particular, GPR plays a positive effect on the oil-biofuel nexus, however, the impact of GPR on the oil-fuel cells nexus exhibits opposite directions in high- and low-correlation regimes. Moreover, the transmission of geopolitical risks to the energy markets is predominantly driven by threats (GPT) during periods of low volatility and correlation, while acts (GPA) play a more significant role during periods of high volatility and correlation. These results emphasize the significance for both investors and policymakers in considering the time-varying impact of geopolitical risks across various market conditions and individual clean energy sub-sectors.