Library Dissertation Showcase

The nexus between geopolitical risk, oil price and option-implied volatilities: a cross-country analysis

  • Year of Publication:
  • 2022

Geopolitical shocks can have massive governmental, societal, and personal consequences immediately or in the near future. This has been researched by many with regards to an array of political and military hostilities; however, due to the contemporary nature of the Russian invasion of Ukraine there is a gap in the literature. The limited research in this area is an important issue that needs to be rectified, hence the reason for this thesis.

This study focuses on the nexus between geopolitical risk, oil price and optionimplied volatilities through a cross-country analysis approach. This thesis is undertaken through the prism of the Russian invasion of Ukraine and its effect on several key financial variables in five European countries. To ensure a comprehensive exploration of this connection, an exhaustive literature review is completed and followed by a quantitative approach using conventional econometric tools. The methodology utilised allows for the following research questions to be answered: 1) Are geopolitical risks, oil prices, asset prices, and macroeconomic events connected to market expectation as measured by option-implied volatilities? 2) Is the model utilised in this thesis useful in forecasting option-implied volatilities? 3) And if so, what effect does the changing nature of the variables have on the option-implied volatilities?

This thesis finds that there is a connection between geopolitical risks, oil prices, asset prices, and market expectation and that the model used is useful in forecasting option-implied volatilities (research question 1/2). It also concludes that the riskfree rate and strike prices of the underlying assets have a negative impact on option-implied volatilities, when increased, as opposed to geopolitical risk, oil price, the Russian invasion of Ukraine, and the market expectation of the U.S stock market which have a positive effect (research question 3).

PLEASE NOTE: You must be a member of the University of Lincoln to be able to view this dissertation. Please log in here.