Revisiting the connectedness between oil prices and uncertainty indicators in BRICS countries

Abstract

The paper revisited the connectedness between oil prices (ROILP), economic policy uncertainty (EPU), and geopolitical risks (GPR) in the BRICS countries using data from January 1997 to October 2022. The study applied the spillover index, a rolling window based on the generalized VAR framework, and a wavelet coherence approach to investigate the passthrough, multiple regime changes, co-movements, and lead-lag status between the series. The study found that oil prices were a significant transmitter of shocks to other variables in the system among countries, with Brazil having the highest spillover index (11.7%) followed by South Africa (10.5%), India (10.2%), China (9.5%), and Russia (9.2%). The rolling spillover from GPR to ROILP suggested that GPR had a varying spillover effect on real oil prices in the BRICS economies, with Russia and India experiencing relatively stronger effects compared to the other countries. The spillover from EPU to ROILP showed that Brazil and China recorded significant increases in spillover effects, both respectively reached peaks of 54% and 61% suggesting their vulnerability to EPU and its impact on real oil prices during economic stress. The wavelet coherence largely revealed mixed directions of co-movement and heterogeneity between ROILP and EPU (GPR) across countries, indicating that the relationship between the variables was not consistent, varied over time and scale. Different from previous studies, the analysis focused on the direction of the spillover between oil prices and uncertainty measures, then estimated the numerical amount of the spillover to discover the variable that gave more shock than it received. While the wavelet coherence identified variations in coherence, across the time and frequency domain, the adoption of the rolling-window technique enabled the capture of the influence of arbitrary multiple regime changes in the spillover. The findings had some policy implications.