Dr. Ehud Ronn's recent update addresses the issue of whether financial markets can isolate and price geopolitical shocks, showing that metrics like oil–equity comovement and volatility are already capturing risks from the 2026 Iran–U.S.–Israel crisis.
Dr. Ronn is a Professor of Finance at the McCombs School of Business, University of Texas at Austin. His research and teaching interests focus on the valuation of energy commodity-contingent securities.
Overview:
Since the onset of the first Persian Gulf War in 1990, a series of geopolitical crises have significantly impacted the oil markets. This research focuses on five market measurable consequences of these events, using the relevant geopolitical crises as a backdrop: The Comovement between the oil and equity financial markets and its relation to the Oil-price risk premium; the Level of oil implied volatility OVX; and the Impact on the volatility “skew” in oil-options markets. These metrics provide precise benchmarks for financial markets to capture supply-side geopolitical disruptions, contrasting with the signals they reflect during demand-driven recession-and-recovery cycles. In addition, we examine the oil implied term structure of volatility (TSOV) to assess how markets differentiate between short term and long-term uncertainty during crises, finding that volatility responses are concentrated in certain crises in the near term. We also consider the term structure of correlation between oil prices and equity prices, to see how these contrast across crises. With the beginning of hostilities in the Persian Gulf on March 1st, we consider the geopolitical metrics of the latest crisis in the Middle East. For past crises, we demonstrate how markets distinctly bracket these crises’ time intervals, offering a “Message from Markets” that highlights their focus on specific geopolitical shocks. The ongoing 2026 Iran–U.S.–Israel crisis as a real-time application of our framework, using contemporaneous market data to evaluate how these forward-looking financial metrics capture and anticipate evolving geopolitical risk.
Check out the full article at the link below. The views expressed in this article are solely those of the authors, who are responsible for the content, and do not necessarily represent the views of Vega Economics. For more information about retaining Dr. Ehud Ronn as an expert, email us at experts@vegaeconomics.com.
