The effect of economic policy uncertainty on stock-commodity correlations and its implications on optimal hedging

Badshah, Ihsan; Demirer, Rıza; Suleman, Muhammad Tahir

doi:10.1016/j.eneco.2019.104553

Cited by 84 publications

(30 citation statements)

References 34 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Several recent studies argued that the relationship between financial markets, especially stock markets, is affected by economic policy uncertainty (Li et al 2015 ; Li and Peng 2017 ; Fang et al 2017 , 2019 ; Badshah et al 2019 ; Matkovskyy et al 2020 ). Almost all these studies argue that EPU negatively impacts the correlations between these variables.…”

Section: Data and Econometric Frameworkmentioning

confidence: 99%

“…In this context, the EPU index, developed by Baker et al ( 2016 ), influences stock market returns (Antonakakis et al 2013 ; Arouri et al 2016 ; Christou et al 2017 ; Guo et al 2018 ; Hu et al 2018 ; Phan et al 2018 ; Xiong et al 2018 ; He et al 2020 ) and volatility (Yu et al 2018 ; Yu and Song 2018 ; Mei et al 2018 ; Balcilar et al 2019 ; Wang et al 2020 ). Therefore, a recent strand of literature focused on EPU’s effect on relationships between financial assets, including relationships between stock markets (Li and Peng 2017 ), bonds and stocks (Fang et al 2017 ; Li et al 2015 ), commodity and stock markets (Fang et al 2018 ; Badshah et al 2019 ), and Bitcoin and conventional assets (Matkovskyy et al 2020 ). Nearly all these studies reported evidence of a negative impact of EPU on the co-movement between these variables, and, in some cases, highlighted a significant portfolio implication related to EPU (Badshah et al 2019 ).…”

Section: Introductionmentioning

confidence: 99%

“…Therefore, a recent strand of literature focused on EPU’s effect on relationships between financial assets, including relationships between stock markets (Li and Peng 2017 ), bonds and stocks (Fang et al 2017 ; Li et al 2015 ), commodity and stock markets (Fang et al 2018 ; Badshah et al 2019 ), and Bitcoin and conventional assets (Matkovskyy et al 2020 ). Nearly all these studies reported evidence of a negative impact of EPU on the co-movement between these variables, and, in some cases, highlighted a significant portfolio implication related to EPU (Badshah et al 2019 ).…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Dynamic connectedness between stock markets in the presence of the COVID-19 pandemic: does economic policy uncertainty matter?

2021

View full text Add to dashboard Cite

This study investigates the dynamic connectedness between stock indices and the effect of economic policy uncertainty (EPU) in eight countries where COVID-19 was most widespread (China, Italy, France, Germany, Spain, Russia, the US, and the UK) by implementing the time-varying VAR (TVP-VAR) model for daily data over the period spanning from 01/01/2015 to 05/18/2020. Results showed that stock markets were highly connected during the entire period, but the dynamic spillovers reached unprecedented heights during the COVID-19 pandemic in the first quarter of 2020. Moreover, we found that the European stock markets (except Italy) transmitted more spillovers to all other stock markets than they received, primarily during the COVID-19 outbreak. Further analysis using a nonlinear framework showed that the dynamic connectedness was more pronounced for negative than for positive returns. Also, findings showed that the direction of the EPU effect on net connectedness changed during the pandemic onset, indicating that information spillovers from a given market may signal either good or bad news for other markets, depending on the prevailing economic situation. These results have important implications for individual investors, portfolio managers, policymakers, investment banks, and central banks.

show abstract

Section: Data and Econometric Frameworkmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Dynamic connectedness between stock markets in the presence of the COVID-19 pandemic: does economic policy uncertainty matter?

2021

View full text Add to dashboard Cite

show abstract

“…Fang et al [38] showed that EPU harms U.S. stock and bond market correlations, while Fang et al [39] documented a positive policy uncertainty effect on the longrun oil-stock correlation. Recently, Badshah et al [40] documented that the EPU effect on stock-commodity correlation is stronger during weak economic conditions. As far as we know, there is no previous study that analysis the EPU effect on agricultural commodity price comovement.…”

Section: Introductionmentioning

confidence: 99%

Can Global Economic Policy Uncertainty Drive the Interdependence of Agricultural Commodity Prices? Evidence from Partial Wavelet Coherence Analysis

et al. 2021

View full text Add to dashboard Cite

This paper employed wavelet coherence and partial wavelet coherence to investigate the time-frequency effect of global economic policy uncertainty on the comovement of five agricultural commodities such as maize, oat, rice, soybean, and wheat using monthly data from January 1997 to December 2019. In general, we observed heterogeneity in comovement structures of the agricultural commodities market at different time-frequency scales which are profound at high frequencies from the bivariate wavelet coherence. The partial wavelet coherence analysis shows that global economic policy uncertainty is a driver of agricultural commodity market connectedness. This implies that extreme changes in economic policy uncertainty have the tendency to influence commodity price comovement. This poses risk to the stability of the agricultural commodities market, which requires the policymaker’s intervention to protect against the spillover risk contagion effect in uncertain times.

show abstract

“…Unlike economic policy uncertainty index Husted et al (2019) construct monetary policy uncertainty index (MPU) based on the Federal Reserve policy meetings and actions, they find that MPU causes a decline in the firms' investment and also affects the output and credit creation. Badshah et al (2019) studies the effects of economic policy uncertainty on the stock and commodity correlations and hedging strategies, and report that impact is more pronounced under weak economic conditions. Additionally, Alola and Uzune (2020) examine the effects of global EPU on the housing market and agriculture land for the major 15 countries in panel data sets, importantly they show that global EPU affects positively on the housing market whereas land was unresponsive.…”

Section: Theoretical Framework and Literature Reviewmentioning

confidence: 99%

Does Policy Uncertainty Affect Equity, Commodity, Interest Rates, and Currency Markets? Evidence From Cboe’s Volatility Index

Shaikh

2020

Journal of Business Economics and Management

View full text Add to dashboard Cite

Economic policy drives investment, production, employment, and other macroeconomic indicators of the economy. The study examines the equity, commodity, interest rates, and currency markets, taking into consideration the US economic policy uncertainty (EPU) index. The present work determines the association among policy uncertainty and volatility index, expressed in terms of generalized autoregressive conditional heteroscedasticity and period of empirical work spanning from 2000 to 2018. The results suggest that equity markets’ volatility tends to be very high based on a high degree of policy uncertainty. The findings on the commodity market indicate that crude oil and gold prices remain more volatile during the presidential election and financial crisis. One of the essential results shows that the 2000s boom, early credit crunch, Lehman’s collapse and recession, and fiscal policy battles have significantly affected the equity, currency, and commodity markets. The interest rates and currency markets have responded considerably to Feds’ and EPU index. The empirical outcome provides evidence that implied volatility index is a forward looking expectation of future stock market volatility, and it uncovers that policy uncertainty affects investor sentiment. The present work holds some practical implications for the government to formulate policies to regulate the US market.

show abstract

The effect of economic policy uncertainty on stock-commodity correlations and its implications on optimal hedging

Cited by 84 publications

References 34 publications

Dynamic connectedness between stock markets in the presence of the COVID-19 pandemic: does economic policy uncertainty matter?

Dynamic connectedness between stock markets in the presence of the COVID-19 pandemic: does economic policy uncertainty matter?

Can Global Economic Policy Uncertainty Drive the Interdependence of Agricultural Commodity Prices? Evidence from Partial Wavelet Coherence Analysis

Does Policy Uncertainty Affect Equity, Commodity, Interest Rates, and Currency Markets? Evidence From Cboe’s Volatility Index

Contact Info

Product

Resources

About