How does economic policy uncertainty drive time–frequency connectedness across commodity and financial markets?

Hao Wu, Huiming Zhu, Fei Huang and Weifang Mao

The North American Journal of Economics and Finance, 2023, vol. 64, issue C

Abstract: This study provides novel insight to the prior literature on the time–frequency connectedness across commodity and financial markets while considering the effect of economic policy uncertainty (EPU). We utilize DY and BK methods combined with the rolling window technique to examine how the connectedness varies over time and across frequencies. Subsequently, we establish regime-switching models to evaluate the influence of EPU on the connectedness and provide implications under different economic states. Our empirical results unveil robust short-term information, volatility, or risk transmission among commodity and financial markets, as they are the main contributors and receivers of shocks, especially during the crisis. Moreover, we identify EPU as a remarkable driver of the interactions among these markets in static and switching regimes. Finally, the optimal weight and hedge ratio responses to EPU are regime-dependent and EPU is more economically important in determining short-term investment. Our findings present vital implications that all market participants should consider the EPU level and prevailing economic conditions when selecting hedging strategies.

Keywords: Commodity and financial markets; Time-frequency connectedness; Economic policy uncertainty; Wavelet-based DCC-GARCH model; Portfolio diversification (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:64:y:2023:i:c:s1062940822002005

DOI: 10.1016/j.najef.2022.101865

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