Disentangling the geopolitical risk and its effects on commodities. Evidence from a panel of G8 countries.

Geopolitical risk pertains to the potential impact of political, economic, and social factors on the global or regional landscape, giving rise to potential disruptions in the prevailing background. This paper examines the dynamic impact of country-specific geopolitical risk indexes on the G8 countries and commodity market prices. Using a sample of monthly data ranging from January 2001 to October 2022, after estimating a time-varying parameter VAR model, we perform an impulse response analysis that accounts for the major political and economic events that have shaken the past two decades. Our main findings show that geopolitical risk transmission differs from country to country and often depends on geographical proximity, that geopolitical risk appears to affect the energy sector more than metals and food, and that the effects of shocks tend to be absorbed within a year. We also find the magnitude of geopolitical shocks in the US and Russia to be the most relevant, especially after the 2008 global crisis and the Russia-Ukraine conflict in 2022. Our results could provide useful information to financial policymakers and market regulators to face external shocks, thereby achieving greater macroeconomic stability.