Geopolitical Risks and Fossil Fuel Returns during the Last Four Decades

Abstract This paper empirically investigates the directional predictability of geopolitical risks (distinguishing between geopolitical acts and threats) on the returns of fossil fuels (crude oil, coal, and natural gas) over the last four decades, from January 1984 to February 2023. The study uses the cross-quantilogram framework, which measures quantile dependence during normal states and extreme events. The main results show that geopolitical risks significantly impact fossil fuel returns, with the largest impact on the crude oil market. Crude oil and coal returns have a strong positive short-run response to geopolitical threats, whereas the effect of geopolitical acts is moderate or insignificant. These results remain consistent even when we consider the impact of economic policy uncertainty in our analysis. A recursive (time-varying) predictability analysis shows a significant positive impact of both geopolitical acts and threats on crude oil returns in the post-Global Financial Crisis era. Notably, this relationship remains robust across major geopolitical disruptions, including the shocks associated with the Russia-Ukraine war.