Impact of Maritime Piracy on Crude Oil Price Volatility

Impact of Maritime Piracy on Crude Oil Price Volatility

Economics

Ilias Douiri

2024

Dr. Natalie Chen

This paper investigates the impact of increasing Houthi pirate attacks on maritime volatility since October 7, 2023, focusing on the dynamics and causal relationship between attacks and market volatility. Using a minute-level dataset, I separately analyse realised and implied volatility through Ordinary Least Squares (OLS) regression and instrumental variable (IV) techniques. I introduce Boolean and inverse logarithmic attack indicators, with the number of Palestinian deaths as an instrumental variable to establish causality. Results reveal a significant increase in volatility following high-magnitude attacks, particularly involving oil tankers, with volatility spikes typically peaking within the first day post-attack. Volatility decay is non-monotonic, indicating that market responses vary in intensity over time. The robustness of our IV model, evidenced by significant coefficients and exclusion restrictions, further supports causal findings. I discuss the policy implications, highlighting the stabilizing effects of a ceasefire on financial markets. I also acknowledge limitations in our dynamic modeling, suggesting the potential for improved accuracy with a GARCH model and additional instruments in future research.

#economics #commodities #commodity #finance #crude #oil #IV #causal #dynamics #pirate #piracy #maritime #palestine #palestinian #OLS #instrument #instrumental