Does geopolitical risk matter in crude oil and stock markets? Evidence from disaggregated data

Abstract

This paper investigates the nonlinear Granger causality and spillover effects among geopolitical risk, crude oil and Chinese disaggregated sectoral stock markets by using a multivariate nonlinear Granger causality test and connectedness network analysis. The nonlinear Granger causality and spillover effects are shown to be heterogeneous across sectors. The nonlinear Granger causality indicates Brent oil is likely to play a more important role in geopolitical risk and Chinese stock markets, especially for the Energy and Financial sectors. But the connectedness network analysis suggests that geopolitical risk is the net receiver of spillover effects from WTI oil and the net transmitter to Brent oil. Chinese sectoral stock markets are the main provider of spillover effects in crude oil and geopolitical risk, and its spillover effects are stronger for the Consumer Discretionary, Industrials, Materials, Health Care and Information Technology sectors. In addition, crude oil may play an essential function as an intermediary receiver of Chinese sectoral stock market shocks to geopolitical risk.