The time-varying and asymmetric impacts of oil price shocks on geopolitical risk

Abstract

This paper explores whether and how three different types of oil price shocks, including the oil supply shock (OSS), aggregate demand shock (ADS), and oil-specific demand shock (ODS), affect geopolitical risk (GPR). Specifically, according to Granger causality tests, we find that changes in OSS and ODS can cause changes in GPR in a linear or nonlinear way, while ADS cannot significantly affect GPR. Based on this result, the dynamic impacts of OSS and ODS on GPR are discussed through the TVP-VAR model. Results of the study indicate that OSS adversely affects GPR in most cases, while the ODS positively affects GPR. More importantly, effects of the two oil shocks (OSS and ODS) on GPR are time-dependent, and the short-term effects are significantly stronger than the medium- and long-term effects. The asymmetric effects of OSS and ODS are further examined. It is found that OSS and ODS affect GPR asymmetrically during the short term, and impacts of the negative OSS and positive ODS are stronger than those of the positive OSS and negative ODS.