Dynamic spillovers of oil price shocks and economic policy uncertainty

Abstract

This study examines the dynamic relationship between changes in oil prices and the economic policy uncertainty index for a sample of both net oil-exporting and net oil-importing countries over the period 1997:01-2013:06. To achieve that, an extension of the Yilmaz (2009, 2012) dynamic spillover index based on structural decomposition is employed. The results reveal that economic policy uncertainty (oil price shocks) responds negatively to aggregate demand oil price shocks (economic policy uncertainty shocks). Furthermore, during the Great Recession of 2007-2009, total spillovers increase considerably, reaching unprecedented heights. Moreover, in net terms, economic policy uncertainty becomes the dominant transmitter of shocks between 1997 and 2009, while in the post-2009 period there is a significant role for supply-side and oil specific demand shocks, as net transmitters of spillover effects. These results are important for policy makers, as well as, investors interested in the oil market.

Uncertainty and crude oil returns

“…These data come from the FRED database at the Federal Reserve Bank of St. Louis. 6 We express oil prices as annualized returns (i.e., the natural logarithmic di¤erence expressed in percentage) multiplied by 252. Note that, instead of using the VIX, 7 a popular measure of the implied volatility of S&P 500 index options, we use the news-based measure of EMU index to ensure that both our measures of uncertainty are derived in a similar method (i.e., news articles-based and, hence, the results, in terms of their relationship with oil, are comparable).…”

“…5 Further details appear at: http://www.policyuncertainty.com/equity_uncert.html. 6 FRED apperas at http://research.stlouisfed.org/fred2/. 7 Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock-market volatility over the next 30 day period.…”

Uncertainty and Crude Oil Returns

“…To better understand our contribution to the literature dealing with uncertainty and oil returns, we brie ‡y review the analysis of Kang and Ratti (2013a) and Antonakakis et al, (2014). 2 Kang and Ratti (2013a), investigate the e¤ect of oil-price shocks on EPU, using a structural vector autoregressive (SVAR) model, estimated with monthly oil data and the EPU index.…”

“…These data come from the FRED database at the Federal Reserve Bank of St. Louis. 6 We express oil prices as annualized returns (i.e., the natural logarithmic di¤erence expressed in percentage) multiplied by 252. Note that, instead of using the VIX, 7 a popular measure of the implied volatility of S&P 500 index options, we use the news-based measure of EMU index to ensure that both our measures of uncertainty are derived in a similar method (i.e., news articles-based and, hence, the results, in terms of their relationship with oil, are comparable).…”

Oil price uncertainty and the business cycle: Accounting for the influences of global supply and demand within a VAR GARCH-in-mean framework

“…Finally, future research might try to integrate other relevant factors into our model to get further insight about what oil price uncertainty actually represents and to control for additional sources of uncertainty. Some promising ground for this has already been laid out by Nazlioglu et al (2015), and Antonakakis et al (2014), for instance, who find significant relationships between oil price uncertainty and financial uncertainty, and oil price shocks and policy uncertainty, respectively. …”