Researchers study how global political conflicts and crude oil price fluctuations can influence stock markets

Researchers from Goa Institute of Management (GIM), IIM Raipur and XLRI Jamshedpur studied  how geopolitical conflicts and fluctuations in crude oil prices can impact stock markets across the world.

The study that has shown how geopolitical events and energy market disruptions impact stock markets across the world has been published in the well-known journal American Business Review.

Researchers

The study was conducted by Prof. Chinmaya Behera, Associate Professor, GIM, along with Prof. Pradiptarathi Panda, Assistant Professor, IIM Raipur, and Prof. Purna Chandra Padhan, Professor, XLRI Jamshedpur.

The research team used daily data from 39 advanced economies, for the period - 24th March 2014 to 15th December 2023, and employed a model-free connectedness approach to analyse volatility spillovers among geopolitical risk, crude oil prices, and stock market returns.

Finding

Based on the analysis mentioned above, the researchers found out that about 72.9% of global financial shocks originating from political conflicts and oil price fluctuations create an impact across stock markets in advanced economies. This demonstrates how global financial systems are linked to one another.

The study also found that countries including Austria, Belgium, France, the Netherlands, Sweden, Switzerland, and Taiwan, are major sources of market disturbances. In contrast, countries such as Chile, Cyprus, Iceland, Latvia, Qatar, and Slovenia have major impact of these market fluctuations.

The study also drove home the point that any change in crude oil prices can predict stock market returns in most advanced economies. Geopolitical risk indicators show strong forecasting ability in selected countries, including the Czech Republic, Greece, Iceland, the Netherlands, Qatar, and Switzerland.  

Interconnected global economy

Speaking about the study, Prof Chinmaya Behera said that in an interconnected global economy, geopolitical events and energy market disruptions affect financial markets across the globe. 

'Our research shows that understanding these interconnected risks is important for investors, policymakers, and financial institutions to develop resilient and informed decision-making frameworks.'

Relevance

Prof. Pradiptarathi Panda, Assistant Professor at IIM Raipur spoke about the relevance of this study. The study makes several important contributions to the existing literature, said Prof Panda.

'It examines the interconnectedness among geopolitical risk, crude oil prices, and stock markets across 39 advanced economies using high-frequency daily data.' 

Additionally, it combines volatility spillover analysis with predictive modelling, offering both risk transmission and forecasting perspectives, he said. 

Strong interconnection

Prof. Purna Chandra Padhan, Professor, XLRI Jamshedpur, said even during periods of structural change and the COVID-19 crisis, geopolitical risk, crude oil prices, and stock markets remained strongly interconnected across advanced economies.

Insights

Findings of this study provides valuable insights for multiple stakeholders like: 

# Investors can develop more effective portfolio diversification and risk management strategies.

# Policymakers can strengthen monitoring of financial stability and systemic risks arising from geopolitical events and energy market disruptions.

# Financial institutions can improve market volatility forecasting and make better-informed investment decisions during periods of global uncertainty.

Financial resilience

This study also provides elaborate insights into financial resilience and risk assessment amid geopolitical conflicts and disruptions. Amid global conflicts, as economies are moving towards uncertainty, this study highlights the importance of understanding interconnected global market structures.

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