The Impact Of Economic Policy Uncertainty On The Commodity-stock Market Correlations

Under the framework of time and frequency domain,this paper studies the nonlinear influence of economic policy uncertainty(EPU)on the correlations between international commodities and China’s stock market,which is of great significance for policy makers and investors to understand the market and assets allocation rationally.Firstly,the time-varying correlation and multi-time scale characteristics of international commodities and Chinese stock market are studied based on wavelet transformation and DCCGARCH-t-Copula model.Empirical results show that the correlations between international commodities and China’s stock market have obvious time-varying characteristics.Comparing the results on different time scales,we can find that international commodities and Chinese stock markets are more relevant in the medium to long term than in the short term.Secondly,based on the multi-timescale dynamic condition correlations,the nonlinear effect of Chinese EPU on the dynamic correlations between international commodities and China’s stock market is further studied by using the quantile regression approach,as well as the differences of the impacts under different timescales.Empirical results show that EPU has a negative impact on market correlations in 2-4 days,and positive impact in the 4-8 days,with a short-term reversal in the direction of impact due to investors overreacting to unexpected events.In the medium and long term,the impact of EPU is more significant,and mainly reflects the obvious characteristic of heterogeneity,which shows negative impacts under low correlation regimes,and positive impacts under high correlation regimes.This is due to the influence of anchoring effect.In addition,the impact of the US economic policy uncertainty on the longterm correlation has shown similar heterogeneity,while in terms of the short-and medium-term correlation,the impact is basically positive.This is because the US economic policy uncertainty has a broader impact on global economic growth,and therefore more likely to lead to positive linkages between international commodities and stock markets.Finally,to provide direct enlightenment and reference for investors to construct portfolio,this paper further investigates the impact of economic policy uncertainty on optimal portfolio weights.The results show that Chinese economic policy uncertainty has a significant positive impact on the optimal portfolio weight of commodity futures,while the US economic policy uncertainty has a negative impact on the optimal portfolio weight,except for the long-term optimal portfolio weight.It means that the optimal portfolio weight is related to the investment horizon of investors and the source of economic policy uncertainty.