Oil Price and Geopolitics Risk: New Causality Insights in Frequency-Domain

The paper explores the causality between oil price and geopolitical risk at global level by using the short- and long-run test of causality in the frequency domain, over the period May, 1987 – April, 2020. For robustness checks, alternative tools in time-domain and additional variables are also considered. The key result claims that the oil price is a crucial signal for geopolitical risk on short- (i.e. up to 3 months) and long-run (i.e. more than 9 months) through its threats component. Interesting, no evidence shows that the oil price can explain the geopolitical acts per se. The results remain robust under the influence of global real economic activity in industrial commodity market. Surprisingly, no causality running from geopolitical risk to oil price is found.