Modeling The Impact Of US Economic Policy Uncertainty On Crude Oil Market And Empirical Evidences

As an important strategic resource,crude oil is very important for maintaining the stability of the global economic and financial system.Therefore,it is vital to investigate factors that may cause fluctuations in crude oil prices.There is a close relationship between crude oil prices and the non-fundamental factors,such as economic policy uncertainty(EPU),so it is of great significance to explore the influence mechanism between them.Therefore,this paper mainly explores the impact of different types of US EPU on crude oil price returns in the time and frequency as well as mix frequency domains.To quantitatively explore the impact of US EPU on crude oil prices.Based on historical data of US EPU and West Texas Intermediate(WTI)crude oil prices from February 1985 to May 2019,this paper first uses the DCC-GARCH model to measure the dynamic conditional correlation between different US EPU and WTI crude oil returns.And then this paper employs the network connectedness method to further analyze the impact of various US EPU indices on WTI returns over time and frequency.Besides,this paper uses GARCH-MIDAS model to explore the impact of low-frequency(monthly)US EPU on high-frequency(daily)crude oil prices.The empirical results show that,first,in the time domain,almost all the EPU indices and WTI returns are negatively correlated during the sample period.Second,in the frequency domains,different types of US EPU have different impact on WTI crude oil returns.At the frequency bands of 1 to 6 months and 6 to 12 months,almost all the EPU indices may significantly affect WTI returns,while at the frequency band of 12 to 24 months,only monetary policy uncertainty,regulation policy uncertainty and national security policy uncertainty may affect WTI returns.Thirdly,the impact of US EPU indices on WTI returns appears particularly stronger when major international events occur,such as the global financial crisis.Forthly,the impact of low-frequency US EPU on high-frequency oil prices is strong,especially the low-frequency US monetary policy uncertainty and national policy uncertainty as well as regulation policy uncertainty have the greatest impact on it.In general,as for policy makers,when the US EPU fluctuate sharply,they should avoid purchasing crude oil reserves.Besides,policy makers should be vigilant when major international emergencies occur.As for investors,especially those who are committed to short-term investments,they are expected to make full use of the US EPU to improve the asset allocation efficiency of crude oil futures.When the US EPU tend to be moderate,investors can consider reasonably increasing WTI crude oil assets.In addition,when major international events occur,WTI crude oil is not a reasonable safe haven.This paper explores the impact of US EPU on oil prices has significant theoretical and practical significance.On the one hand,it has enriched the existing researches in oil market impact mechanism.On the other hand,it provides reasonable policy recommendations for policymakers and investors in China.