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COVID-19 pandemic, oil prices, stock market, geopolitical risk and policy uncertainty nexus in the US economy: Fresh evidence from the wavelet-based approach

ABSTRACT: In this paper, we analyze the connectedness between the recent spread of COVID-19, oil price volatility shock, the stock market, geopolitical risk and economic policy uncertainty in the US within a time-frequency framework. The coherence wavelet method and the wavelet-based Granger causality tests applied to US recent daily data unveil the unprecedented impact of COVID-19 and oil price shocks on the geopolitical risk levels, economic policy uncertainty and stock market volatility over the low frequency bands. The effect of the COVID-19 on the geopolitical risk substantially higher than on the US economic uncertainty. The COVID-19 risk is perceived differently over the short and the long-run and may be firstly viewed as an economic crisis. Our study offers several urgent prominent implications and endorsements for policymakers and asset managers. Highlights • We analyze the time-frequency relationship between COVID-19 outbreak, oil price, geopolitical risk, economic uncertainty and US stock market.• The wavelet-based approach shows that the associations between the variables vary across time and investment horizons.• COVID-19 outbreak has a greater effect on the US geopolitical risk and economic uncertainty than on the US stock market.• Oil is leading the US market at low and high frequencies throughout the observation period.• While oil markets may recover through OPEC+ negotiations, the COVID-19 uncertainty remains the main concern of US policymakers.

SUBMITTER: Sharif A

PROVIDER: S-EPMC7227524 | biostudies-literature | 2020 May

REPOSITORIES: biostudies-literature

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Project description:Stock market, is one of the most important financial market which has a close relationship with a country's economy, due to which it is often called the barometer of the economy. Over the past 25 years, the stock markets have been affected by different global economic shocks. Various researchers have analyzed different aspects of these effects one by one, however, this study is an assessment of stock market interrelationship of emeriging Asian economies which include most of the East Asian, and Southeast Asian emerging economies with special focus on China for past decades during which different crisis occurred. We used Morgan Stanley capital international (MSCI) daily indices data for each stock market and compared Chinese stock market with the stock markets of India, Pakistan, Malaysia, Singapore, and Indonesia. We analyzed the data through the individual wavelet power spectrum, cross-wavelet transform and wavelet coherence, to determine the correlation and volatility among the selected stock markets. These model have the power to analyze co-movements among these countries with respect to both frequency and time spaces. Our findings show that there are co-movement patterns of higher frequencies during the crises periods of 1997, 2008 and 2015. The dependency strength among the considered economies is noted to increase in the crisis periods, which implies increased short- and long-term benefits for the investors. From a financial point of view, it has been determined that the co-movement strength among the emerging economies of Asia may have an effect on the VaR (Value at Risk) levels of a multi-country portfolio. Furthermore, the stock market of China shows a high correlation with the other six Asian stock emerging markets in both high and low-frequency spectrums. The association of the south and east Asian stock market with Chinese stock markets show the interconnection of these economies with the economy of China since past two decades. These findings are useful for investors, portfolio managers and the policymaker around the globe.

Dataset Information

COVID-19 pandemic, oil prices, stock market, geopolitical risk and policy uncertainty nexus in the US economy: Fresh evidence from the wavelet-based approach

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