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The Ephemeral Brent Geopolitical Risk Premium

Hany Mohamed, Mahmoud El-Gamal, Amy Myers Jaffe

Economics of Energy & Environmental Policy, Volume: 9, Issue: 2, Pages: 31 - 50

Swansea University Author: Hany Mohamed

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DOI (Published version): 10.5547/2160-5890.9.2.habd

Abstract

We study the changing relationship between Brent oil prices and geopolitical risk, conditional on physical oil market conditions. We conduct the analysis at three frequencies, medium (1-3 years), high (2-3 months), and very high (daily), using three complementary techniques at the different levels (...

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Published in: Economics of Energy & Environmental Policy
ISSN: 2160-5882
Published: International Association for Energy Economics (IAEE) 2020
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URI: https://cronfa.swan.ac.uk/Record/cronfa54393
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spelling 2020-09-22T14:02:58.4251400 v2 54393 2020-06-05 The Ephemeral Brent Geopolitical Risk Premium 2930976ccf31ef0c71f78f7cb47e2d5d Hany Mohamed Hany Mohamed true false 2020-06-05 We study the changing relationship between Brent oil prices and geopolitical risk, conditional on physical oil market conditions. We conduct the analysis at three frequencies, medium (1-3 years), high (2-3 months), and very high (daily), using three complementary techniques at the different levels (respectively, continuous wavelet partial coherence, VAR and GARCH-MIDAS) over the period April 1993 to the end of 2018. At the annual frequency, we find evidence of a sustained positive relationship between oil prices and geopolitical risk over the past decade -- with geopolitical risk leading during the Arab Spring, resulting in a substantial geopolitical risk premium, and lagging thereafter by about two months, as oil markets first reacted to and then anticipated geopolitical events. At the monthly frequency, we find the same positive correlation with oil prices anticipating geopolitical risk in both parts of the sample and find that realized geopolitical strife has not led to higher prices in either subsample. At the daily frequency, we find that geopolitical risk has had a positive effect on oil price volatility in later days during the second half of the sample (2005 to 2018). Our findings suggest that some financial market speculators, such as macro hedge funds and algorithmic traders, may amass long positions in Brent in anticipation of geopolitical threats that might potentially lead to oil disruptions. Journal Article Economics of Energy & Environmental Policy 9 2 31 50 International Association for Energy Economics (IAEE) 2160-5882 Oil price cycle, geopolitics, economic activity, inventories 1 4 2020 2020-04-01 10.5547/2160-5890.9.2.habd http://dx.doi.org/10.5547/2160-5890.9.2.habd COLLEGE NANME COLLEGE CODE Swansea University 2020-09-22T14:02:58.4251400 2020-06-05T15:06:15.6153822 Faculty of Humanities and Social Sciences School of Management Hany Mohamed 1 Mahmoud El-Gamal 2 Amy Myers Jaffe 3 54393__17433__2b55feb4ff8b4c62a734068e0f9e60ee.pdf Abdel-Latif&El-Gamal&Jaffe2020_EEEP.pdf 2020-06-05T15:10:56.0557714 Output 711042 application/pdf Accepted Manuscript true 2023-04-02T00:00:00.0000000 true
title The Ephemeral Brent Geopolitical Risk Premium
spellingShingle The Ephemeral Brent Geopolitical Risk Premium
Hany Mohamed
title_short The Ephemeral Brent Geopolitical Risk Premium
title_full The Ephemeral Brent Geopolitical Risk Premium
title_fullStr The Ephemeral Brent Geopolitical Risk Premium
title_full_unstemmed The Ephemeral Brent Geopolitical Risk Premium
title_sort The Ephemeral Brent Geopolitical Risk Premium
author_id_str_mv 2930976ccf31ef0c71f78f7cb47e2d5d
author_id_fullname_str_mv 2930976ccf31ef0c71f78f7cb47e2d5d_***_Hany Mohamed
author Hany Mohamed
author2 Hany Mohamed
Mahmoud El-Gamal
Amy Myers Jaffe
format Journal article
container_title Economics of Energy & Environmental Policy
container_volume 9
container_issue 2
container_start_page 31
publishDate 2020
institution Swansea University
issn 2160-5882
doi_str_mv 10.5547/2160-5890.9.2.habd
publisher International Association for Energy Economics (IAEE)
college_str Faculty of Humanities and Social Sciences
hierarchytype
hierarchy_top_id facultyofhumanitiesandsocialsciences
hierarchy_top_title Faculty of Humanities and Social Sciences
hierarchy_parent_id facultyofhumanitiesandsocialsciences
hierarchy_parent_title Faculty of Humanities and Social Sciences
department_str School of Management{{{_:::_}}}Faculty of Humanities and Social Sciences{{{_:::_}}}School of Management
url http://dx.doi.org/10.5547/2160-5890.9.2.habd
document_store_str 1
active_str 0
description We study the changing relationship between Brent oil prices and geopolitical risk, conditional on physical oil market conditions. We conduct the analysis at three frequencies, medium (1-3 years), high (2-3 months), and very high (daily), using three complementary techniques at the different levels (respectively, continuous wavelet partial coherence, VAR and GARCH-MIDAS) over the period April 1993 to the end of 2018. At the annual frequency, we find evidence of a sustained positive relationship between oil prices and geopolitical risk over the past decade -- with geopolitical risk leading during the Arab Spring, resulting in a substantial geopolitical risk premium, and lagging thereafter by about two months, as oil markets first reacted to and then anticipated geopolitical events. At the monthly frequency, we find the same positive correlation with oil prices anticipating geopolitical risk in both parts of the sample and find that realized geopolitical strife has not led to higher prices in either subsample. At the daily frequency, we find that geopolitical risk has had a positive effect on oil price volatility in later days during the second half of the sample (2005 to 2018). Our findings suggest that some financial market speculators, such as macro hedge funds and algorithmic traders, may amass long positions in Brent in anticipation of geopolitical threats that might potentially lead to oil disruptions.
published_date 2020-04-01T04:07:54Z
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score 11.012678

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