Abstract
Due to multiple properties, the international crude oil price is influenced by various and complex interrelated factors from different determinants in different periods. However, the previous studies on crude oil price fluctuation with economic policy uncertainty (EPU) haven’t taken a wider range of volatility sources into their analysis frameworks. In this paper, the time-varying parameter factor-augmented vector autoregressive (TVP-FAVAR) model is introduced in order to avoid important information loss, as well as capture the time-varying impact on crude oil price fluctuation by EPU. Furthermore, the differences on crude oil fluctuations from net-oil exporting and net-oil importing country’s EPU are also elaborated. Here are three findings as follows. First, the impacts of global EPU on the crude oil price volatility show time-varying characteristics both in time duration and time-points. Second, the instantaneous impacts of global EPU on the price volatility of crude oil are directly relevant to major events, and the impacts are different in event types as well. Third, the time-varying characteristics depicting the impacts of EPU in countries who are net-oil exporter and net-oil importer on price volatility of crude oil show heterogeneity in fluctuation range, fluctuation intensity, and stage.
Highlights
Economic policy uncertainty (EPU), as a dominant indicator of many events, has a significant external shock on crude oil price fluctuations [1,2,3]
As we found in the empirical process, based on the basic time-varying parameter vector autoregressive (TVP-vector autoregressive (VAR)) framework made up of GEPU and crude oil price fluctuation, when we add a new key volatility source into the framework in turn, the results of GEPU’s impact on crude oil price fluctuation change significantly
The adjustment of GEPU has a positive feedback mechanism, that is, it is positively promoting economic growth and stability, while the fluctuation of crude oil price is, on the contrary, decreasing. What does it mean that the periodic peak points of the short-term shock mainly appear at a certain point during some major events and the peaks vary in size? Obviously, the characteristics of periodic peak points indicates that the impact degree of GEPU on crude oil price volatility is strongly related to with major events
Summary
Economic policy uncertainty (EPU), as a dominant indicator of many events, has a significant external shock on crude oil price fluctuations [1,2,3]. EPU has an impact on crude oil price volatility through commodity market. EPU affects the fluctuation of crude oil price by impacting the behavior of decision makers in the commodity market [4,5,6,7,8,9,10,11]. EPU affects crude oil price fluctuation via financial market. Besides the hedging of crude oil by commodity market participants, financial market speculators use different periods or regions’ markets to make cross-market and cross-regional oil speculation. In various oil speculative transactions, EPU is an important factor that affects the speculators’ decision-making. EPU plays a critical role in predicting the fluctuation of crude oil price
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