Revisiting oil and tanker shipping markets: The role of geopolitical risk in shaping spillover dynamics

Abstract

This study investigates the dynamic relationship between the crude oil and tanker shipping markets under geopolitical risk shocks, focusing on the differential impacts of threat-based and action-based geopolitical risks, as well as supply-demand disruptions. We employ the VAR-BEKK-GARCH model to capture spillover dynamics and their variations before and after geopolitical shocks, while the TVP-SV-VAR model provides a novel approach to visualize the intensity, direction, and duration of the effects of geopolitical risks over time. Our findings contribute to the understanding of altered market interactions under geopolitical risks by distinguishing between threat-based and action-based shocks, as well as analyzing the asymmetric impacts of supply-side and demand-side disruptions. Specifically, geopolitical risk is found to significantly amplify volatility spillovers from the BDTI to the crude oil market (+6.91 %), while reducing the reverse spillover (−14.92 %). Threat-based risks enhance bidirectional spillovers between crude oil and BCTI, while action-based risks dampen these spillovers. Furthermore, action-based risks have a more persistent effect, whereas threat-based risks induce a stronger, short-term response. Geopolitical risks impact correlations and hedge ratios, affecting diversification and portfolio allocation. These results emphasize the need to differentiate geopolitical risks, offering insights for energy policy, shipping resource allocation, and cross-market risk management.