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Does oil price respond to macroeconomic uncertainty? New evidence

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Abstract

Using a new measure of economic policy-related uncertainty (EPU), this study evaluates whether macroeconomic uncertainty affects oil price or vice versa. Specifically, we investigate mean and volatility spillovers between the EPU index and oil returns and the underlying drivers for the time-varying correlation. Our results illustrate the importance of policy uncertainty. Although the mean spillover of EPU on oil returns is negligible in the long run, the mean spillover in the short term and the volatility spillover of EPU are significant for oil spot and futures returns. Moreover, we provide evidence that both oil supply shocks and real economic shocks lead the correlation between the EPU and oil returns to fluctuate over time.

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Notes

  1. Several pieces of evidence and analysis, including a human audit of 4300 newspaper articles, indicate that the EPU index offers a good proxy for movements in policy-related economic uncertainty over time.

  2. We assume that the uncertainty index and oil returns follow a univariate GARCH(1,1) process, respectively.

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Acknowledgments

This research is financially supported by the National Natural Science Foundation of China Under Project No. 71401193, the Key Project of Philosophy and Social Sciences Research, Ministry of Education Under Project No. 14JZD016 and the Program for Innovation Research in Central University of Finance and Economics.

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  1. School of Finance, Central University of Finance and Economics, 39 South College Road, Haidian District, Beijing, 100081, China

    Libo Yin

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  1. Libo Yin
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Yin, L. Does oil price respond to macroeconomic uncertainty? New evidence. Empir Econ 51, 921–938 (2016). https://doi.org/10.1007/s00181-015-1027-7

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  • DOI: https://doi.org/10.1007/s00181-015-1027-7

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