By Daniel Murray, Deputy CIO and Global Head of Research, EFG Asset Management (U.K.) and Member of the GCARD’s Editorial Advisory Board
We live in a world of heightened geopolitical risk where developed countries are reliant on less politically stable countries for the supply of many commodities. Yet there is little academic literature that investigates these relationships. This paper presents such an analysis using a new index of geopolitical risk. An initial simple event analysis is performed comparing spikes in geopolitical risk with the performance of various financial markets. The results are ambiguous: the relationships vary enormously over time and across financial indices. A vector autoregressive analysis is performed to examine the relationships more closely. Granger causality from commodity prices to geopolitical risk is shown to have existed before the global financial crisis but not subsequently. Impulse response analysis generally shows a weak response both from commodities to geopolitical risk as well as in the other direction. This is in contrast with commonly held views about the impact of geopolitical risk on commodity prices.
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