Dynamic regime differences in the market behavior of primary natural resources in response to geopolitical risk and economic policy uncertainty

The study explores the dynamic effects of geopolitical risks and economic policy uncertainties on oil and natural gas prices in the US market’s less volatile and highly volatile regimes, employing Markov regime-switching dynamic regression models (MS-DR) with monthly data from January 2000 to November 2022. Our empirical results demonstrate that a positive shock in the geopolitical risk of the USA (GPR_US) causes an increase in the growth rate of the prices of WTI at the high volatile periods (regime 1), and its one-period lagged effects are negative at time t in the less volatile periods (regime 0), and it cumulatively causes an increase in WTI price. GPR_US and one lagged effect negatively and positively natural gas prices (NGAS) at both regimes. respectively, where the dynamic cumulative impact of GPR_US causes NGAS to increase. World geopolitical risks (GPR) lead to an increase in WTI and natural gas prices. Furthermore, US economic policy exerts a reduction in WTI price at both less and highly volatile regimes, and its lag influences are positive at both regimes, where it cumulatively causes a decrease in WTI price. In a similar manner, global economic policy uncertainty also reduces WTI. US economic policy and its lag effects exhibit an increase and decrease in NGAS prices in the high volatile regime but exhibited a cumulatively positive response to shock in economic policy uncertainty. Global economic policy uncertainty causes nature gas prices to go up. Hence, geopolitical risks and economic policy uncertainty might have a complex impact on the prices of natural resources. It depends on the specific circumstances and the supply-demand dynamics in the market. Our findings offer insightful implications for economic agents.