Dynamic nonlinear effects of geopolitical risks on commodities: Fresh evidence from quantile methods

Abstract

This paper examines the dynamic nonlinear effects of the Geopolitical Risk (GPR) on commodities using quantile methods. Our rolling window quantile estimations show that non-energy sectors, such as food and beverage, are not easily influenced by geopolitical events, while energy sectors can be easily affected. The recent COVID-19 pandemic has no strong effects on these relationships. Quantile-on-quantile results demonstrate that the magnitude of the co-movement of GPR and non-energy sectors is very small, whereas the magnitude of the co-movement of GPR associated with the energy sector is larger. Additionally, during bullish markets, GPR can exert positive effects on commodity markets. However, under other market conditions, negative effects are apparent. Finally, we use a nonparametric causality-in-quantiles test to provide fresh evidence of the explanatory power of GPR on commodity markets.