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The Dynamic Correlation between China’s Policy Uncertainty and the Crude Oil Market: A Time-varying Analysis

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  • En-Ze Wang
  • Chien-Chiang Lee

Abstract

This research investigates the dynamic correlation between China’s policy uncertainty and the crude oil markets (i.e. domestic and international markets) using monthly time-series data from May 2003 to December 2018. To consider the non-linear and dynamic properties, we adopt the time-varying parameter structural vector autoregression model (TVP-SVAR) to estimate the dynamic correlations between the time series. By employing four categorical policy uncertainty indices, i.e. monetary policy uncertainty index (MYPU), fiscal policy uncertainty index (FLPU), exchange rate policy uncertainty index (EXER), and trade policy uncertainty index (TEPU), our results reveal that the correlation between China’s policy uncertainty and real crude oil returns is time-varying and non-linear. Specifically, the independence between policy uncertainty and oil returns varies more constantly and at a high degree while the time-varying interaction between policy uncertainty and global oil production (global economic activity) varies at a lower frequency and at a low level. Furthermore, regarding the associations between categorical policy uncertainty and global oil returns, the average correlation of EXER (negative) is the strongest one, followed by FLPU (negative), then MYPU (positive), and finally TEPU (negative). Moreover, it is noteworthy that WTI (Daqing) crude oil prices are utilized to increase the robustness of our conclusions. Finally, we generally confirm the dynamic and negative correlation between China’s geopolitical risk and crude oil returns. It is evidently clear from the results that investors should pay close attention to the policy uncertainty to avoid the adverse impact of specific policy uncertainty on crude oil returns.

Suggested Citation

  • En-Ze Wang & Chien-Chiang Lee, 2022. "The Dynamic Correlation between China’s Policy Uncertainty and the Crude Oil Market: A Time-varying Analysis," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(3), pages 692-709, February.
  • Handle: RePEc:mes:emfitr:v:58:y:2022:i:3:p:692-709
    DOI: 10.1080/1540496X.2020.1837106
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    Cited by:

    1. Naqvi, Bushra & Rizvi, Syed Kumail Abbas & Hasnaoui, Amir & Shao, Xuefeng, 2022. "Going beyond sustainability: The diversification benefits of green energy financial products," Energy Economics, Elsevier, vol. 111(C).
    2. Xie, Yutang & Cao, Yujia & Li, Xiaotao, 2023. "The importance of trade policy uncertainty to energy consumption in a changing world," Finance Research Letters, Elsevier, vol. 52(C).
    3. Zhang, Xiaoming & Zhang, Tong & Lee, Chien-Chiang, 2022. "The path of financial risk spillover in the stock market based on the R-vine-Copula model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 600(C).
    4. Chen, Juan & Xiao, Zuoping & Bai, Jiancheng & Guo, Hongling, 2023. "Predicting volatility in natural gas under a cloud of uncertainties," Resources Policy, Elsevier, vol. 82(C).
    5. Liu, Min & Lee, Chien-Chiang, 2022. "Is gold a long-run hedge, diversifier, or safe haven for oil? Empirical evidence based on DCC-MIDAS," Resources Policy, Elsevier, vol. 76(C).

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