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

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  We analyze the time-frequency connectedness between the COVID-19 outbreak, crude oil price, geopolitical risk, the economic policy uncertainty and the US stock market.

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  The wavelet-based approach revealed that the associations between the variables vary across time-scales and investment horizons.

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  COVID-19 outbreak has a greater effect on the US geopolitical risk and economic uncertainty than on the US stock market.

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  Oil prices were leading the US market at both low and high frequencies throughout the observation period.

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  While oil markets may recover through OPEC+ alliance negotiations, the uncertainty regarding the COVID-19 outbreak remain the main concern of the US policymakers.