Geopolitical Risk, Volatility and Dynamic Correlation in Energy Markets : Evidence using a DCC-GARCH model

Sammanfattning

This study investigates the relationship between geopolitical risk, volatility and dynamic correlation between Brent crude oil and Dutch TTF natural gas markets. Using daily front-month futures prices from 2004 to 2026 and the daily Geopolitical Risk (GPR) index developed by Caldara and Iacoviello (2022), the study applies a DCC-GARCH(1,1) framework with GJR-GARCH-X specifications. Three GPR measures are examined: aggregate risk, geopolitical threats (GPRT), and geopolitical acts (GPRA). The results show that geopolitical risk significantly increases conditional volatility in both markets. The effect is robust across all specifications for Brent crude oil, while TTF natural gas volatility is primarily driven by geopolitical threats rather than realized acts. Moreover,the dynamic conditional correlation between the two commodities is time-varying, and periods of heightened geopolitical risk often coincide with stronger estimated correlation, especially during the Russia–Ukraine war and the 2026 Iran conflict. The study contributes to the literature by providing a short-run analysis of two structurally different energy benchmarks and by distinguishing between different dimensions of geopolitical risk. The findings have important implications for energy risk management and policy.