The asymmetric and multi-scale volatility correlation between global oil price and economic policy uncertainty of China.

Abstract

With the monthly data of WTI oil price and economic policy uncertainty (EPU) of China from January 2000 to August 2020, this paper detailedly investigates the asymmetric volatility correlations between two types of EPU of China and global oil price in different time scales. The empirical results demonstrate that the volatility correlation between EPU of China and West Texas Intermediate (WTI) oil price is mainly reflected in the monetary policy uncertainty (MPU), while that of fiscal policy uncertainty (FPU) is much weaker. Specifically speaking, the volatility correlation between MPU of China and downward WTI oil price is significantly negative in the short-middle term (4–8 months) and changes to positive in the middle-long term (8–16 months), while that of upward WTI oil price is only significantly positive in the long term (16–32 months). Our findings provide a deeper understanding of the oil price-EPU correlation in China, and can be valuable guidance for diversified market participants such as government policy-makers and global investors.