Volatility modeling of the impact of geopolitical risk on commodity markets

Abstract

This study analyses the impact of the Geopolitical Risk Index (GPR) on the volatility of commodity futures returns from 4 January 2010 to 30 June 2023, using Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) models. It expands the research scope to include precious metals, agricultural products, energy, and industrial metals. The study differentiates between the impacts of geopolitical threat events and actions using GPRACT and GPRTHREAT indicators. Findings reveal that negative geopolitical shocks increase commodity returns’ volatility more than positive shocks. Specifically, gold, silver, and natural gas are negatively affected, while wheat, corn, soybeans, cotton, zinc, nickel, lead, WTI oil, and Brent oil experience positive effects. Platinum, cocoa, coffee, and copper show no significant impact. These insights highlight the importance of geopolitical risks on commodity market volatility and returns, aiding in risk management and portfolio diversification. Policymakers, financial market stakeholders, and investors can leverage these findings to better understand the GPR’s relationship with commodity markets and develop effective strategies.