Causality between Geopolitical Risks Shock and Crude Oil Trade in the USA – A Time-varying Approach

The paper is an empirical investigation of the causal nexus between geopolitical risk and crude oil trade in the USA for the period from February 1985 to June 2018. It is innovative both in that it uses the Caldara and Iacovello (2018) geopolitical risk as well as for the time varying causality method that it employs. When the whole sample with no breaks is used for the analysis, very little evidence of causality between the variables is present, namely only crude oil exports Granger cause the geopolitical risk. With the adoption of a rolling window estimation technique, numerous causality relationships become revealed, either uni-directional or bi-directional for different periods of time. This underlines the importance of the time-varying method and its contribution to the understanding of the geopolitical risk and crude oil trade nexus which constitutes very important information for investors who must hedge against the oil price fluctuations caused by geopolitics