Abstract:
Economic uncertainties pose a major problem to global economies. The issue of
economic uncertainties in recent times has become a cause of excessive worry to
investors and policymakers. This study examines the effect of economic
uncertainty proxied by country-level and global economic policy uncertainty
(EPU), oil volatility index (OVX) and geopolitical risk (GPR) on the returns of
financial assets (G7 stocks, gold, Bitcoin, and the European Union Allowance
Future market). Considering data spanning from 1st January 2012 to 31st
December 2022, the study employed the Variational Mode Decomposition (VMD)
based quantile regression and quantile-on-quantile regression analysis, followed
by the wavelet analysis and the Disk and Panchenko causality test. The findings
from the VMD-based quantile regression revealed that the influence of global and
country-level EPU, OVX and GPR on the returns of financial assets is dependent
on the market condition and investment horizons. The results of the quantile
regression revealed that financial assets are greatly affected adversely during the
bearish market conditions. Likewise results from the wavelet analysis revealed an
economic uncertainty-led adverse comovement during times of high uncertainty.
Again, the Disk and Panchenko causality test supported the findings of the
quantile regression and wavelet techniques, where the study observed a short term
causal nexus between economic uncertainties and the financial assets under study.
The significant adverse effect of economic uncertainty on the returns of financial
assets is of interest and relevance to investors and policymakers as the findings
have practical application to enlighten their decision-making.
