Did real economic uncertainty drive risk connectedness in the oil–stock nexus during the COVID-19 outbreak? A partial wavelet coherence analysis

Abstract

Abstract The paper extends the literature by examining whether real economic policy (the business condition risk (ADS)) can derive the risk connectedness in the oil–stock nexus during the COVID-19 outbreak using the multivariate wavelet coherency (MWC) and partial wavelet coherency (PWC) methods. The wavelet methods allow to isolate the effect of different global risk indices (such as the US economic uncertainty index (EPU), the crude oil volatility index (OVX), and the geopolitical risk index (GPR)) on the level of risk connectedness. Based on the daily data for the period January 2018–December 2020, we find that very strong impact of real economic uncertainty indices on risk connectedness. This impact is time-varying and frequency-sensitive, and it exhibits event-specific patterns. We find stronger MWC and PWC between real economy uncertainty indices and risk connectedness at lower frequencies. However, during the coronavirus disease 2019 (COVID-19) crisis, higher coherencies are found at higher frequencies; conditional to the effect of each global risk factor (EPU, GRP, and OVX), we also find higher PWC between oil and equity volatilities at lower frequencies. This study provides useful guidance to regulators and portfolio risk diversifiers. JEL Classifications : G12; G15; G18 ; G01; F3; E44