Macroeconomic Uncertainty and Crude Oil Futures Volatility–Evidence from China Crude Oil Futures Market

Abstract

This paper investigates whether the macroeconomic uncertainty factors can explain and forecast China’s INE crude oil futures market volatility. We use the GARCH-MIDAS model to investigate the explaining and predicting power of the macroeconomic uncertainties. We considered various geopolitical risk (GPR) indices, economic policy uncertainty (EPU) indices, and infectious disease pandemic (IDEMV) indices in our model. The empirical results suggest that the geopolitical risk, the geopolitical act risk, the global economic policy uncertainty, the economic policy uncertainty from the United Kingdom, and the economic policy uncertainty from Japan comprehensively integrate the information contained in the rest factors, and have superior predictive powers for INE crude oil future volatility. These findings highlight the importance of the impact of macroeconomic uncertainty factors has on the crude oil futures market, and indicate that the macroeconomic uncertainties need to be considered when explaining and forecasting crude oil futures market volatility.

Geopolitical Risk and Stock Market Volatility in Emerging Economies: Evidence from GARCH-MIDAS Model

“…With only a few exceptions [7,24,48], however, the above studies are mainly focused on the relationship between GPR and the stock market returns; the relationship between GPR and volatility is understudied in the literature. Fornari and Mele [51] argue that financial volatility can significantly influence capital investment, consumption, and economic activities; thus, the reason behind these changes should have drawn further attention among academics and practitioners [52].…”

“…Fornari and Mele [51] argue that financial volatility can significantly influence capital investment, consumption, and economic activities; thus, the reason behind these changes should have drawn further attention among academics and practitioners [52]. Furthermore, except for [24], previous studies mainly concentrate on the developed economies, and the case of emerging economies needs to receive more attention. More importantly, the studies concerning the relationship of stock volatility and GPR do not distinguish the differences between regional and global GPR.…”

“…erefore, under the current size of China's OFDI, geopolitical risks will inevitably affect China's financial markets. Previous studies have shown that GPR can affect the price dynamics of China's crude oil futures [24] and China's rare metals [25]. Furthermore, studies have also shown that GPR can affect the dynamics of China's stock market by using panel-GARCH models [26], and GPR can spill over to renewable energy stock markets in China [27].…”

“…e theoretical framework can be traced back to the works of Sharpe [16], Eugene and French [17], and Frey and Kucher [18], which argue that historical events are reflected in asset prices. Following this framework, studies turned their interest into the influences of traditional macroeconomic variables, such as real GDP growth rate, industrial production growth rate, and unemployment rate, and macroeconomic uncertainty variables, such as economic policy uncertainty, GPR, and infectious disease pandemic on stock returns (see [11,12,19], among others) and volatility of stock returns (see [20][21][22][23][24], among others).…”

“…However, they are failed to distinguish the differences of the impact of general GPR from categorical GPR (categorical GPR refers to the geopolitical action risk and the geopolitical threat risk.). As in the study of Caldara and Iacoviello [4], the geopolitical threats index (GPR Treat ) and the geopolitical acts index (GPR Act ) are proposed to capture different features of GPR, and current studies found that the impacts of GPR Treat and GPR Act on asset prices are different and ambiguous [4,[23][24][25]. us, it is necessary to fill this gap by investigate the performance of GPR Treat and GPR Act individually and provide evidence on the mechanism of GPR's impact on China's stock market.…”