Nonlinear Spillovers from Stock, Gold, Oil, and T-bill Volatilities to Predict Economic Policy Uncertainties
Abstract
Economic policy uncertainity (EPU) shapes the economic development of a country and any instability in policy results in financial markets downturn. Several elements are considered as predictors of EPU. Of these, commodities (oil, gold) are the most common. This study consider financial markets with four major asset classes gold, crude oil, 10-year treasury bonds, and stock prices to examine a nonlinear and asymmetric spillover that influences EPU. The dataset comprises oil price volatility, gold price volatility, T-bills volatility, stock price volatility, and the EPU index of eight countries. NARDL model is used to capture the impact of the nonlinear behavior of uncertainties on gold, oil, T-Bills, and stock market volatilities. It captures both long-run and short-run non-linearities by separating explanatory variables into partially positive and partially negative components. The outcomes reveal positive and negative shocks to oil price volatility, gold price volatility, T-Bills volatility, and stock price volatility which positively affect the EPU of all countries. However, Canada does not bear any effect of negative shocks in the short-run to gold price and oil price volatilities to predict the EPU. USA shows the negative impact of negative shocks for all asset classes. T-Bills derived negative shocks adversely affect China at 5% level of significance. Furthermore, the effect of positive shocks is more pronounced than negative shocks. The outcomes support the short-run and long-run asymmetric impact of oil, gold, T-Bills, and VIX volatilities to predict EPU. This study helps investment funds in managing risk, asset pricing, and formulating economic policy differentiated to positive and negative shocks.
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