Time-varying effects of global economic policy uncertainty shocks on crude oil price volatility：New evidence. (March 2021) - Lyu, Yongjian
Abstract: This paper is the first to investigate the time-varying effects of global economic policy uncertainty (GEPU) shocks on the volatility of two international pricing benchmarks for crude oil – Brent and West Texas intermediate (WTI) crude oil prices – under dynamic structural changes. Besides the conclusions similar to the existing literature, such as economic uncertainty shocks can significantly increase crude oil price volatility, the time-varying framework also leads to a few new and intriguing findings. First, the impact of GEPU shocks on crude oil volatility varies over time and can be amplified under extreme market conditions, such as the 2007–2009 global financial crisis and the 2010–2012 European sovereign debt crisis. Second, there exist some differences between the responses of Brent crude oil price volatility and WTI crude oil price volatility to GEPU shocks. In particular, the largest effects of GEPU shocks on Brent and WTI crude oil price volatilities appear during different periods. Third, from the time-varying forecast error variance decomposition, the contributions of GEPU shocks to variations of crude oil price volatilities tend to become larger during the 2007–2009 global financial crisis and the 2010–2012 European sovereign debt crisis. Similarly, the historical decomposition results also indicate that the cumulative effects of GEPU shocks on crude oil volatility tend to be larger during periods of crisis. Highlights: GEPU shocks' impact on crude oil volatility are amplified under extreme conditions. GEPU shock produces the largest effect on Brent volatility during 2013–2014. GEPU shock produces the largest effect on WTI volatility during the 2008–global financial crisis. GEPU shocks' contribution to variations of oil volatilities become larger in crisis.