Does Economic Policy Uncertainty Connect Financial Markets? Evidence from Oil and Commodity Currencies

39 Pages Posted: 9 Jan 2019

See all articles by § Claudiu Albulescu

§ Claudiu Albulescu

Management Department, Politehnica University of Timisoara

Riza Demirer

Southern Illinois University Edwardsville - Department of Economics & Finance; Economic Research Forum (ERF)

Ibrahim Raheem

University of Kent - Department of Economics

Aviral Kumar Tiwari

Rajagiri Business School; IFHE University (ICFAI) - Faculty of Management

Date Written: December 27, 2018

Abstract

We explore the possible causal effect of economic policy uncertainty on the connectedness of crude oil and currency markets using a sample of commodity currencies from advanced and emerging nations. A battery of linear and nonlinear Granger-based causality tests indicate the presence of a causal relationship between economic policy uncertainty and the connectedness of oil and currency markets, particularly at low frequencies and notably in the case of spillovers from oil to the Australian dollar. While crude oil is found to serve as a net transmitter of shocks to currencies across all frequency bands, the spillover effects from oil are largely concentrated towards the G10 currencies of AUD and NZD that are often used as investment currencies in carry trade strategies. Overall, our findings suggest the presence of a short run, pass-through effect of economic policy uncertainty via oil prices, spilling over to the currency market, providing support for the portfolio and wealth channel that facilitates risk transmissions across these markets.

Keywords: economic policy uncertainty, oil-currency nexus, nonlinear causality, frequency domain, volatility spillover

JEL Classification: Q41, F31, F42, C14

Suggested Citation

Albulescu, § Claudiu and Demirer, Riza and Raheem, Ibrahim and Tiwari, Aviral Kumar, Does Economic Policy Uncertainty Connect Financial Markets? Evidence from Oil and Commodity Currencies (December 27, 2018). Available at SSRN: https://ssrn.com/abstract=3306910 or http://dx.doi.org/10.2139/ssrn.3306910

§ Claudiu Albulescu

Management Department, Politehnica University of Timisoara ( email )

P-ta Victoriei, no. 2
Timisoara, 300006
Romania

HOME PAGE: https://sites.google.com/site/claudiutiberiualbulescu/

Riza Demirer (Contact Author)

Southern Illinois University Edwardsville - Department of Economics & Finance ( email )

Department of Economics & Finance
Alumni Hall 3144
Edwardsville, IL 62026-1102
United States
(618) 650-2939 (Phone)
(618) 650-3047 (Fax)

HOME PAGE: http://www.siue.edu/~rdemire/

Economic Research Forum (ERF)

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Cairo, Cairo
Egypt

HOME PAGE: http://erf.org.eg/affiliates/riza-demirer-3/

Ibrahim Raheem

University of Kent - Department of Economics ( email )

Keynes College
Kent, CT2 7NP
United Kingdom

Aviral Kumar Tiwari

Rajagiri Business School ( email )

Kochi, 682039
India

IFHE University (ICFAI) - Faculty of Management ( email )

India

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