The impact of geopolitical risk on energy and precious metal commodity markets using the DCC-GARCH MIDAS model
Farenayla Aesya, Saiful Izzuan Hussain, Steven LiPurpose
This study aims to investigate the impact of geopolitical risk on selected energy and precious metal commodities, namely WTI crude oil, Brent crude oil, natural gas, gold and silver.
Design/methodology/approach
The study uses a Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroscedasticity Mixed Data Sampling (DCC GARCH MIDAS) model to examine the relationship between geopolitical tensions and commodity price volatility. This framework enables the integration of lower-frequency geopolitical risk measures with higher-frequency commodity price data, providing a nuanced view of their dynamic linkages.
Findings
The results confirm that energy commodities, particularly the two benchmark crude oils (WTI and Brent), are highly sensitive to geopolitical uncertainty. The strongest positive correlation between geopolitical risk and oil prices is observed during the Russia–Ukraine invasion. In contrast, gold and silver exhibit relatively low correlations with geopolitical risk and their price responses appear to be more event-specific.
Originality/value
This study contributes to the literature on geopolitical risk by jointly examining its effects on both energy commodities and precious metals. The findings show that gold’s hedging capacity is not consistently effective, as its role as a hedge appears to depend on the nature of the geopolitical event. Overall, the results provide useful insights for risk management in periods of heightened geopolitical uncertainty.