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Detecting lag linkage effect between economic policy uncertainty and crude oil price: A multi-scale perspective

Huizi He, Mei Sun, Cuixia Gao and Xiuming Li

Physica A: Statistical Mechanics and its Applications, 2021, vol. 580, issue C

Abstract: This paper proposes a new compound model to investigate the linkage effect between economic policy uncertainty (EPU) and West Texas Intermediate (WTI) crude oil future price from 1985 to 2018. Two main steps are involved in this proposed model: multi-scale analysis and time delay cross correlation analysis. Considering nonlinear and nonstationary characteristics of crude oil price, the long-term, medium-term, and short-term trends of WTI price are correspondingly obtained by decomposition and reconstruction. To capture the linked characteristics in different periods, we segment the sample data into 14 periods. Finally, we analyze the linkage effect between EPU index and crude oil price based on direction of link, time lag and association strength. The results indicate that information will be transmitted from EPU index to crude oil price regardless of the time scale, but the transmission capacity is different. The period of reverse linkage between oil price and EPU index accounts for 63% of the sample interval, whereas the same linkage mainly occurs when oil price rises. The linkage lag and association strength of EPU index and oil price have obvious dissimilarity in different periods. Potential application value for energy policy makers and oil related investors are presented.

Keywords: EPU index; Crude oil price; Linkage; Multi-scale; Time lag (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.physa.2021.126146

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