The effect of oil implied volatility and geopolitical risk on GCC stock sectors under various market conditions

Bouri, Elie; Hammoud, Rami; Kassm, Christina Abou

doi:10.1016/j.eneco.2023.106617

Cited by 38 publications

(6 citation statements)

References 33 publications

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“…Frequent geopolitical events have been determined to exert a substantial influence on financial markets [4][5][6][7][8][9][10][11][12][13][14][15][16][27][28][29][30]. As mutual funds constitute a growing portion of investors' portfolios PLOS ONE [3], their performance and risk exposure are becoming ever more crucial for investors.…”

Section: Discussionmentioning

confidence: 99%

“…As for the impact of geopolitical risk on the commodity market, [ 8 , 28 , 34 ] establish that the geopolitical risk demonstrates a robust predictive capability for crude oil volatility, particularly within the Gulf Cooperation Council (GCC) countries. In the context of the Chinese market, the geopolitical risk exerts varying short-term effects on a range of commodities, including composite commodities, energy commodities, agricultural commodities, industrial metals, and precious metals [ 13 ].…”

Section: Literature Reviewmentioning

confidence: 99%

“…Additionally, we contribute to the growing literature on the economic consequences of geopolitical risk [4][5][6][7][8][9][10][11][12][13][14][15][16][27][28][29][30], by providing original evidence that the fund risk taking is significantly correlated with geopolitical risk. To the best of our knowledge, this paper is the first specific research exploring the impact of geopolitical risk on funds' investment styles, particularly risk taking tendencies.…”

Section: Introductionmentioning

confidence: 99%

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The time-varying effects of geopolitical risk on mutual fund risk taking

Liu,

Chen,

Zhu

et al. 2024

PLoS ONE

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Based on a time-varying parameter vector autoregression model with stochastic volatility (TVP-VAR-SV), this paper investigates the dynamic effects of geopolitical risk on mutual fund risk taking in China across three-time horizons and at three selected time points. Overall, the impulse responses are time-varying and we find a negative effect of geopolitical risk on mutual fund risk taking until 2015, with the short-term effect being the most pronounced, suggesting that when professional investors such as mutual fund managers are faced with the stock valuation uncertainty due to a geopolitical shock, they choose to reduce market risk exposures. After 2015, the short-term effect begins to diminish and gradually turns positive, which could be explained by the fact that with the increasing abundance and diversification of investment instruments, fund managers have more effective investment tools and more sophisticated trading strategies to hedge against geopolitical risk, rather than reducing market risk exposure. Further, we explore the heterogeneous effects of eight types of geopolitical risk and three types of mutual fund. The results indicate that the effect of geopolitical actions is stronger than that of geopolitical threats, while the effect of narrow geopolitical risk is stronger than that of broad geopolitical risk. Moreover, we find that the response of the risk taking of growth funds to the geopolitical risk is weaker than that of balanced and income funds.

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Section: Discussionmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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The time-varying effects of geopolitical risk on mutual fund risk taking

Liu,

Chen,

Zhu

et al. 2024

PLoS ONE

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“…Elsayed and Helmi (2021) demonstrated the main role of GPR in the transmission of volatility and spread dynamics in financial markets [41]. Several researchers have demonstrated the significance of crude oil returns and GPR on stock prices from a dynamic perspective [42][43][44][45].…”

Section: Literaturementioning

confidence: 99%

Impact of Geopolitical Risk on G7 Financial Markets: A Comparative Wavelet Analysis between 2014 and 2022

Panazan,

Gheorghe

2024

Mathematics

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This study investigates co-movements between the GPR generated by the Crimean Peninsula’s annexation in 2014, the Russia–Ukraine war in 2022, and the volatility of stock markets in the G7 states. Using wavelet analysis, concentrated co-movement was found for all indices in both periods. Contrary to the general perception, we find that the G7 financial market response in 2014 was robust. Using a time-varying parameter vector autoregression (TVP-VAR) test, we found a larger reaction in the amplitude of the G7 financial markets in 2022 than in 2014. The financial markets in France, Germany, and the UK showed a similar reaction in 2022. We have identified some common aspects, even if the political and military contexts of the two studied events were completely different. Our findings offer new and interesting implications for understanding how geopolitical risk affects financial assets for market participants with multiple investment horizons and strategies.

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“…The bulk of studies in this stream of literature fall into two sub-streams according to their main research objective. Studies in the first sub-stream focus on the relationship between the stock markets in this region and oil prices or/and oil price uncertainty (Abakah et al 2023;Arouri et al 2011;Abuzayed and Al-Fayoumi 2021;Awartani and Maghyereh 2013;Bani-Khalaf and Taspinar 2022;Basher et al 2018;Bouri et al 2023;Elsayed et al 2023;Hamdi et al 2019;Mohanty et al 2011). The econometric methods used in these studies are diverse, and the conclusions they derived are detailed.…”

Section: Interdependencies Among the Mena And Gcc Regions And Other F...mentioning

confidence: 99%

The Dynamic Return and Volatility Spillovers among Size-Based Stock Portfolios in the Saudi Market and Their Portfolio Management Implications during Different Crises

Al-Nassar

2023

IJFS

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This study contributes to the ongoing debate on the size effect and size-based investment styles by investigating the return and volatility spillovers and time-varying conditional correlations among Saudi large-, mid-, and small-cap indices. To this end, we utilize the weekly returns on the MSCI Saudi large-, mid-, and small-cap indices over a long sample period, spanning several crises. The econometric approach that we use is a VAR-asymmetric BEKK-GARCH model which accounts for structural breaks. On the basis of the VAR-asymmetric BEKK-GARCH model estimation results, we calculate portfolio weights and hedge ratios, and discuss their risk management implications. The empirical results confirm the presence of unilateral return spillovers running from mid- to small-cap stocks, while multilateral volatility spillovers are documented, albeit substantially weakened when accounting for structural breaks. The time-varying conditional correlations display clear spikes around crises, which translate to higher hedge ratios, increasing the cost of hedging during turbulent times. The optimal portfolio weights suggest that investors generally overweight large caps in their portfolios during uncertain times to minimize risk without lowering expected returns. The main takeaway from our results is that passively confining fund managers to a particular size category regardless of the prevailing market conditions may lead to suboptimal performance.

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The effect of oil implied volatility and geopolitical risk on GCC stock sectors under various market conditions

Cited by 38 publications

References 33 publications

The time-varying effects of geopolitical risk on mutual fund risk taking

The time-varying effects of geopolitical risk on mutual fund risk taking

Impact of Geopolitical Risk on G7 Financial Markets: A Comparative Wavelet Analysis between 2014 and 2022

The Dynamic Return and Volatility Spillovers among Size-Based Stock Portfolios in the Saudi Market and Their Portfolio Management Implications during Different Crises

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