Economic Uncertainty And Financial Asset Returns

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.