Geopolitical risk on energy, agriculture, livestock, precious and industrial metals: New insights from a Markov Switching model

Abstract

This paper delineates a novel approach to analyze the dynamic effects of a Geopolitical Risk (GPR) shock on five types of commodities (energy, precious metals, agriculture, industrial metals, and livestock products). Covering a period of 10 years, from 2013 to 2023, we use a Markov-Switching model with two regimes (low and high volatility). The findings indicate that a Markov-Switching model with a t-distribution for the errors is the most suitable to analyze the impact of GPR shocks on commodity markets. All commodities react to a GPR shock but differently. The energy market is the most reactive market and livestock is the less sensitive one. Our results suggest that investors may want to consider the impact of geopolitical risk on different types of commodities before making investment decisions. Market participants should pay attention to changes in the Geopolitical Risk Index during high volatility regimes to better understand the behavior of commodity markets.