Dynamic Spillover across Uncertainty, Financial and Commodity Markets

Abstract

This paper investigates the dynamic spillover across uncertainty, financial and commodity markets. We measure the return spillover in US policy uncertainty, financial assets (S&P 500, Treasury bond and US dollar index) and WTI between January 2000 to July 2020. Applying Diebold and Yilmaz (2012), we perform both static and dynamic analysis to measure the total return spillover over our sample period. First, we find total spillover (21.9%) across the uncertainty, financial assets, and WTI. The magnitude of total spillover are intensified in the aftermath of financial crises (the 2008-2009 GFC and 2011-2012 EDC) as well as the COVID-19 outbreak, indicating a reduction in diversification benefits. This finding confirms that financial crises and uncertainty increase the contagion risk. Second, S&P 500 is the biggest net transmitter of spillovers, followed by USDX, while WTI, EPU, and TB are net recipients of spillovers. Finally, following the global financial crisis and the COVID-19 outbreak, the net spillover makes both positive and negative jumps, and the level of net spillovers is more intense. In the COVID-19 outbreak period, S&P 500, TB, and USDX become the transmitters of spillover, while EPU and WTI are the recipients of spillover.