Assessment of the asymmetric impacts of the geopolitical risk on oil market dynamics

Abstract

This study employs the time-varying parameter structural vector autoregression (TVP-SVAR) models to assess the asymmetric effects of the geopolitical risk (GPR) on oil production and oil prices for BRIC countries and in the global scale. Although slope-based asymmetry tests deriving from non-linear VAR model of Kilian and Vigfusson suggest that the effects on oil production and oil prices are symmetric, the directions and the magnitude of the impulse response functions (IRFs) of TVP-SVAR models did not confirm the relevant relationship. More specifically, it was revealed that the rise/fall of the GPR of Brazil, Russia and India can lead to increasing/decreasing oil prices. While our findings imply that changes in oil prices may not be a factor affecting the oil production through the changes in GPR, we stress that the increase/decrease of GPRs affect the future economic expectations negatively/positively which in turn leads to a change in the oil production.