How economic policy uncertainty affects asymmetric spillovers in food and oil prices: Evidence from wavelet analysis

Abstract

In the context of potential asymmetric volatility spillovers between two crucial commodity markets, oil and food, little is known about the vital role played by policy uncertainties. This study explores the heterogeneous roles of policy uncertainties on spillovers between crude oil and corn and soybeans under good and bad volatility regimes from both time and frequency domain perspectives. We find, first, that oil-food market spillovers are asymmetric, time-varying and crisis-sensitive. Second, the time-frequency dependence between policy uncertainties and oil-food volatility spillovers is prominent in the context of major international events. Third, monetary policy uncertainty (TPU) weakly affects the oil-food spillover system. Still, in the long run, economic policy uncertainty (EPU) and fiscal policy uncertainty (FPU) exert significant positive effects, while monetary policy uncertainty (MPU) is negative. In addition, there is considerable heterogeneity in the roles played by policy uncertainties in the specific crude oil-food pairwise spillovers. Our study has important implications for policymakers to avoid large-scale cross-market spillover transmission and for investors to hedge risks and construct appropriate portfolios.