How geopolitical risk drives spillover interconnectedness between crude oil and exchange rate markets: Evidence from the Russia-Ukraine war

This study examines the dynamics of spillover interconnectedness between oil and exchange rate market in the purview of the Russia-Ukraine war. The study employed the Time-Varying Parameters Vector-Autoregression (TVP-VAR) model to investigate the connectedness between the aforementioned markets in three segments: before, during and the full sample. The TVP-VAR results reveal two exciting findings: First, the market connectedness increased from pre-war to higher levels. Second, the pattern of risks and opportunities transmission across these markets can change in the outbreak of geopolitical conflict. Furthermore, the study employed causality-in-quantile and quantile regression methodologies to formally establish that geopolitical risk may drive market risks and opportunities spillover. The causality-in-quantile test suggests that geopolitical risk could predict the total and net directional spillover behaviour between the markets before and during the war. On the other hand, the quantile regression results revealed that geopolitical risks have varying and substantial relationships with the total and net directional connectedness of the oil and exchange rate markets before and during the war. These findings have important policy implications for policymakers and market participants.