Financial stress, economic policy uncertainty, and oil price uncertainty

Abstract

The role of non-financial sector market fluctuations such as the role of oil price uncertainty either on financial stability or on policy-related economic uncertainty has not been investigated extensively. This study examines the connectedness of financial stress and economic policy uncertainty with a non-financial market of Brent oil and its prices, by employing a Diebold and Yilmaz (2012, 2014) generalized framework and a TVP-VAR model specification. We use monthly series of 7 advanced countries, namely the US, UK, Canada, Japan, Germany, France, and Italy and 2 different indices for measuring financial stress (FSI) and economic policy uncertainty (EPU), over the period 2007–2020. Furthermore, the literature on oil price uncertainty and its effect on financial stress and on economic policy uncertainty is scarce. We additionally, examine the impact of oil price volatility on FSI and on EPU, by employing a structural VAR-GARCH-M model specification and IRFs analysis. Our results from the dynamic connectedness analysis indicate that during the COVID-19 pandemic, spillovers have increased substantially but not exceeded the Global Financial Crises 2007 levels. Finally, our estimation results from the IRFs analysis reveal that oil price uncertainty is associated with higher financial stress for some of the G7 countries while it is not related to economic policy uncertainty.