Dynamic connectedness between uncertainty and energy markets: Do investor sentiments matter?

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This paper examines the dynamics between the energy markets and uncertainty indices from January 1 st , 2001 till July 1 st , 2020, using the time-domain TVP-VAR-based connectedness approach of Antonakakis and Gabauer (2017). In particular, we examine whether Economic Policy Uncertainty (EPU), Geopolitical Risk (GPR), World Trade Uncertainty (WTU), and Equity Market Uncertainty (EMU) have an impact on the dynamics of returns of oil, gas, and coal markets. Results suggest that the average influence of market uncertainty on energy markets is approximately 53%. Second, we find that the EPU contributes the most to the energy markets, followed by the World Trade Uncertainty index. Third, considering the energy markets, we find that the oil markets contribute the most to other markets. Fourth, we find that the EMU receives the most contribution from other markets, followed by the EPU. Finally, we observe that the total connectedness index is relatively high, coinciding with the Global Financial Crisis of 2008 and the COVID-19 pandemic outbreak. Further analysis of the possible effect of the investor sentiment on the dynamic connectedness shows that the consumer sentiment index (CSI) has a negative (positive) effect on the uncertainty (energy) net connectedness. Our findings have important implications for risk management in energy markets and entail some policy implications for regulators. • We examine the dynamics between energy markets and uncertainty indices using the TVP-VAR model. • Results suggest the average influence of market uncertainty on energy markets is approximately 53%. • EPU contributing the most to the energy markets, while oil markets contribute the most to other markets. • Total connectedness index is relatively high coinciding with the Global Financial Crisis and COVID-19 pandemic crisis.