Impact of Economic Uncertainty, Geopolitical Risk, Pandemic, Financial & Macroeconomic Factors on Crude Oil Returns -- An Empirical Investigation

TL;DR

This paper uses simultaneous quantile regression to analyze how macroeconomic, financial, pandemic, and geopolitical factors influence crude oil futures returns, revealing varying impacts across different market conditions.

Contribution

It introduces a comprehensive multi-factor model incorporating pandemic and geopolitical risks, validated by PCA and VIF, to better understand crude oil return dynamics.

Findings

Crude oil returns are sensitive to global economic conditions.

Impact varies across different market periods.

Pandemic and geopolitical risks significantly affect crude oil futures.

Abstract

This study aims to use simultaneous quantile regression (SQR) to examine the impact of macroeconomic and financial uncertainty including global pandemic, geopolitical risk on the futures returns of crude oil (ROC). The data for this study is sourced from the FRED (Federal Reserve Economic Database) economic dataset; the importance of the factors have been validated by using variation inflation factor (VIF) and principal component analysis (PCA). To fully understand the combined effect of these factors on WTI, study includes interaction terms in the multi-factor model. Empirical results suggest that changes in ROC can have varying impacts depending on the specific period and market conditions. The results can be used for informed investment decisions and to construct portfolios that are well-balanced in terms of risk and return. Structural breaks, such as changes in global economic conditions or shifts in demand for crude oil, can cause return on crude oil to be sensitive to changes in different time periods. The unique aspect ness of this study also lies in its inclusion of explanatory factors related to the pandemic, geopolitical risk, and inflation.