Uncertainty as a driving force behind the connectedness of oil-shocks and term structures : Empirical evidence from oil-exporting and oil-importing countries

Absztrakt (kivonat)

This paper examines the dynamic effect of oil price shocks on sovereign yield curves, and then analyzes the effect of evolutions in economic policy uncertainty and geopolitical risk uncertainty on the strength of the relationship. The analysis is performed on a group of countries, which are divided based on their positions in the oil market. Oil-exporting countries in the sample include Norway, Mexico, Canada, the UK, and Venezuela; while oil-importers are comprised by China, Japan, South-Korea, the US, and Germany. The main research question is whether the connectedness of the oil market and the yield curve is following a dynamic trajectory instead of a static one, and if so, whether there is a difference depending on the position of the country in the market. Moreover, the effect of EPU and GPU is especially relevant in the 2020s, which have produced responses from both central banks and central budgets, and a return of geopolitical conflicts. Thus, another question is whether the uncertainty regarding economic policy and geopolitical risk impacts the connectedness of oil and term structures. The results of this paper indicate that the relationship between oil price shocks and yield curves is time-varying, with some difference between oil-exporting and oil-importing countries. Moreover, the periods when the relationship is significant are associated with times of economic or geopolitical uncertainty. I show that uncertainty regarding economic policy and geopolitics, as well as market volatility are significant determinants of the connectedness between oil and yield curve, and they sometimes explain a significant portion of it.