Systemic risk and economic policy uncertainty: International evidence from the crude oil market

Abstract

The causal relationship between systemic risk and global economic policy uncertainty remains unexplored, even though the latter serves as an important factor in asset pricing and macroeconomic forecasting. This study extends Adrian and Brunnermeier’s (2016) framework, combining it with mixed data sampling (MIDAS) to calculate the systemic risk in the crude oil market based on monthly frequencies. We employ Diebold and Yilmaz’s (2009, 2014) connectedness measures to identify the causal relationship between systemic risk in the crude oil market and global economic policy uncertainty. We find that global economic policy uncertainty is economically significant in determining systemic risk, although its role weakens during financial crises. In other words, less disagreement in economic policies may decrease systemic risk. Therefore, both policymakers and financial practitioners should be aware of the causality changes and increasing connectedness within the system and make decisions accordingly.