Impact of geopolitical risks on energy price volatility

Abstract

[Objective] Geopolitical risks are considered extreme risks that can cause dramatic fluctuations in energy prices. This study aims to explore the impact of global geopolitical risks on energy price volatility (crude oil, natural gas, and heating oil), thereby providing theoretical support and policy references for maintaining energy price stability under the influence of geopolitical risks and safeguarding China’s energy security. [Methods] From a theoretical perspective, this study systematically explored the underlying mechanisms of energy price volatility by considering both energy returns and volatility. Based on this, the quantile-on-quantile approach and the causality-in-quantiles test were used to examine the asymmetric effects of geopolitical risks on energy returns and volatility across different risk levels and market conditions from June 28, 1990, to January 6, 2020. Moreover, the heterogeneous effects of different types of geopolitical risks(geopolitical threats and geopolitical acts) on energy returns and volatility were further explored. [Results] (1) In both high-risk and low-risk phases, geopolitical risks could cause extreme values in energy returns across different market environments. (2) In a bull market, lower geopolitical risks levels had a suppressive effect on energy volatility, while higher geopolitical risks levels amplified energy volatility, leading to extreme values within a specific range. (3) Geopolitical risks could predict energy returns and partial energy volatility under different market conditions. (4) The impact of different types of geopolitical risks on energy returns and volatility demonstrated significant differences, with geopolitical threats exerting a more pronounced impact. [Conclusion] Through empirical research, this study reveals the asymmetry and heterogeneity of the impacts of geopolitical risks on energy price volatility across different risk levels and market conditions. This provides a scientific basis for mitigating the adverse impacts of such risks, stabilizing energy market prices, and safeguarding China’s energy security.