Extreme Dependence under Uncertainty: an application to Stock, Currency and Oil Markets

• Date: 01 March 2017
• Author: Stelios Bekiros,Gazi Salah Uddin
• DOI: http://doi.org/10.1111/irfi.12095
• Published date: 01 March 2017

Extreme Dependence under

Uncertainty: an application to

Stock, Currency and Oil Markets

STELIOS BEKIROS

†,‡

AND GAZI SALAH UDDIN

§

†

Department of Economics, Via della Piazzuola, Florence, Italy,

‡

IPAG Business School, Paris, France and

§

Department of Management and Engineering, Linköping University, Linköping,

Sweden

ABSTRACT

We explore the impact of uncertainty on financial markets in the aftermath of

the global financial crisis. In particular, we investigate the temporal dynamics

of the dependence structure of stock, currency and oil markets in the United

States using a nonparametric copula approach. Policy uncertainty is modeled

via the EPU index of Baker et al. (2013). We find evidence of a pronounced

extreme tail asymmetric interrelationship between the crude oil market and

economic uncertainty.

JEL Codes: C32; C58; G10; G17

I. INTRODUCTION

In an earlier work, Bernanke (1983) was the first to investigate how high uncer-

tainty can influence the decision-making process of economic agents through

price shocks. A recent stream of papers relates the impact of macro-financial

policy-generated uncertainty to oscillations in growth, inflation and interest

rates (Bloom 2009). The derived spillovers are in turn expected to affect stock,

currency and oil markets. However, empirical evidence only for stock returns

can be found in the works of Antonakakis et al. (2013) and Kang and Ratti

(2014). Recently, Bloom (2014) highlighted the important implications of eco-

nomic uncertainty in portfolio diversification.

Economic policy uncertainty was quantified by Baker et al. (2013). In particu-

lar, the news-based EPU index uses newspaper archives from the Access World

News Bank service. The primary source comprises month-by-month searches

* We would like to thank the Editor Professor Ramazan Gençay for kindly providing codes and for his

valuable comments which significantly improved our work. The first author has received funding

from the EU Horizon 2020 research and innovation program under the MS-C Grant No 656136.

© 2016 International Review of Finance Ltd. 2016

International Review of Finance, 17:1, 2017: pp. 155–162

DOI: 10.1111/irfi.12095