Gjr-Garch Midas Model Based Analyse Geopolitical Risk and Energy Price Volatility

Abstract

This article empirically investigates the impact of GPR (geopolitical risk) and its subdivided indices on the volatility of energy prices and whether they have predictive power for the volatility of energy futures prices. The single factor, double factor GJR-GARCH-MIDAS models, are applied for evaluating the interpretation effect and prediction ability of different GPR indexes on the volatility of energy prices. The empirical results show that GPR and GPRT (geopolitical threats) have a significant positive impact on energy price volatility, which can be explained in terms of energy's commodity attributes, financial attributes and national energy security, while GPRA (geopolitical acts) has a negative impact which considered to be related to investor sentiment. The results also indicate that the double factor GJR-GARCH-MIDAS model, which introduces RV (Realized Volatility) and GPRs has better fitting effect and stronger prediction ability than model with single factor. Through further research on subdivided indices, we also found that war threats, military buildup, beginning and escalation of war can explain and predict the volatility of energy prices. The prediction success rates of the models were generally greater than 70% and robustness checks further confirm the conclusion above. We hope this article can provide a reference for further understanding geopolitical risks and preventing abnormal volatility of energy prices.

Keywords: Geopolitical Risk, Energy Price, Mixing Data, Asymmetric effect, GJR-GARCH-MIDAS