The Unassuming Economist

From a paper by Amar Rao, Brian Lucey, and Satish Kumar:

“The functioning of energy markets is essential for global stability and is heavily influenced by geopolitical risks. Understanding these risks is critical for policymakers, market analysts, and nations. This study investigates the impact of geopolitical risks and their components on the futures markets of WTI crude oil and natural gas, utilizing time and frequency connectedness analysis along with impulse response function methods. The analysis is based on a dataset comprising daily prices of spot and futures contracts (across various maturities) as well as treasury yields. Our findings reveal that geopolitical risks have a significant, negative impact on the interest-adjusted spread of WTI crude oil. In contrast, the interest-adjusted spread of natural gas futures (NGF) displays a more complex pattern: while short-term maturities show an insignificant response, long-term maturities exhibit a significant reaction. Spillover effects are more pronounced in the short term but tend to weaken over longer horizons. This study underscores the dynamic influence of geopolitical risks on both key energy markets. Its findings offer a practical framework for risk management, equipping market participants and policymakers with valuable insights to better understand and respond to geopolitical risks in the energy sector.”