Application of Multifractal Analysis in Estimating the Reaction of Energy Markets to Geopolitical Acts and Threats

Abstract

Since the industrial revolution, the geopolitics of energy has been a driver of global prosperity and security, and determines the survival of life on our planet. This study examines the nonlinear structure and multifractal behavior of the cross-correlation between geopolitical risk and energy markets (West Texas Intermediate (WTI), Brent, natural gas and heating oil), using the multifractal detrended cross-correlation analysis. Furthermore, an in-depth analysis reveals different associations of the indices of overall geopolitical risk, geopolitical acts, and geopolitical threats against the four energy products. Based on daily data ranging from 1 January 1985 to 30 August 2021, the findings confirm the presence of nonlinear dependencies, suggesting that geopolitical risk and energy markets are interlinked. Furthermore, significant multifractal characteristics are found and the degree of multifractality is stronger between the overall geopolitical risk and WTI while the lowest degree of multifractality is with Brent. Overall, for the WTI and heating-oil markets, the influence of geopolitical threats is more pronounced rather than their fulfilment. Contrarily, the Brent and natural gas are more correlated to geopolitical acts. Energy products exhibit heterogeneous persistence levels of cross-correlation with all the indicators of geopolitical risk, being more persistent in the case of small fluctuations compared to large fluctuations.

Revisiting the impact of geopolitical risk on Sukuk, stocks, oil and gold markets during the crises period: fresh evidence from wavelet-based approach

“…(2022) using fifteen worldwide equity markets as the basis. Based on multifractal detrended cross correlation analysis, Aslam et al . (2022) discovered nonlinear dependencies among GPR and energy markets and noted that multifractality is robust among GPR and WTI compared to other energy marketplaces like natural gas, BRENT and heating oil.…”

The footprints of Russia–Ukraine war on the intraday (in)efficiency of energy markets: a multifractal analysis

“…Before the invasion, the Brent market is seen as highly efficient, but after the invasion, the natural gas market is seen as the most efficient, ranking first. This may be due to the fact that the impact of geopolitical events is more closely linked to Brent oil than to other energy markets (Bouoiyour et al, 2019;Aslam et al, 2022a). Brent is more globally representative than WTI and is used to price roughly 65% of the global crude oil market (Chen et al, 2021;Zhang et al, 2021).…”

“…Hence, Russia exercises enormous power and geopolitical leverage, as it can influence prices and the “rules of the game”. Therefore, the surprising finding for natural gas could be explained by the underlying complexity of natural gas prices, driven by the interplay of many other market-specific factors such as storage costs, transportation costs, seasonal consumption effect and so on (Aslam et al. , 2022a).…”

“…This may be due to the fact that the impact of geopolitical events is more closely linked to Brent oil than to other energy markets (Bouoiyour et al. , 2019; Aslam et al. , 2022a).…”

“…Bouoiyour et al (2019) examined the effect of geopolitical threats and realized acts on the informational efficiency of the oil market. Aslam et al (2022a) reported heterogeneous responses of WTI, Brent, natural gas and heating oil to various categories of geopolitical risk.…”