https://doi.org/10.52903/wp2025342
NAVIGATING CRUDE OIL VOLATILITY FORECASTS: ASSESSING THE CONTRIBUTION OF GEOPOLITICAL RISK
Panagiotis Delis
Bank of Greece and University of Piraeus
Stavros Degiannakis
Bank of Greece and Panteion University of Social and Political Sciences
George Filis
University of Patras
ABSTRACT
Media evidence and previous research have established that geopolitical risk is an important driver of crude oil price volatility. In this paper, we assess whether the importance of geopolitical uncertainty is also "translated" into valuable predictive information for oil price volatility forecasts. To do so, we construct a "beauty contest" where we assess the incremental predictive content of geopolitical risk against several other highly important uncertainty indicators, for forecasting horizon up to 22-days ahead. Initially, we use a HAR model which is augmented by each of the uncertainty indicators. Subsequently, we develop a Dynamic Model Averaging (DMA) methodology, where we assess whether the combination of all uncertainty indices (DMA-all), vis-a-vis a DMA model without the geopolitical uncertainty index, exhibits superior predictive performance. Our findings show that geopolitical uncertainty offers superior predictive information when combined with other uncertainty indicators. More importantly, we show that the inclusion of geopolitical uncertainty in a DMA framework generates superior trading profits and risk management measures’ predictions, in comparison with benchmark models, especially in longer-run horizons. Several implications are drawn from these results.
Keywords: HAR model, Realized oil price volatility, Geopolitical risk, Dynamic model averaging, Forecasting evaluation, Value-at-Risk, Trading profits
JEL-classifications: C10, C22, C53, F30, G17, Q47
Disclaimer: The views expressed in this paper are those of the authors and not necessarily those of the Bank of Greece.
Corresponding author:
Panagiotis Delis
Economic Analysis and Research Department
Bank of Greece
E. Venizelos 21, 102 50, Athens, Greece
Tel. no. +30 2103202371
email: pandelis@bankofgreece.gr