Abstract:
A recent literature emphasizes the role of news-based economic policy uncertainty (EPU) and
equity market uncertainty (EMU) as drivers of oil-price movements. Against this backdrop,
this paper uses a k-th order nonparametric quantile causality test, to analyze whether EPU and
EMU predicts stock returns and volatility. Based on daily data covering the period of 2nd
January, 1986 to 8th December, 2014, we find that, for oil returns, EPU and EMU have strong
predictive power over the entire distribution barring regions around the median, but for
volatility, the predictability virtually covers the entire distribution, with some exceptions in
the tails. In other words, predictability based on measures of uncertainty is asymmetric over
the distribution of oil returns and its volatility.
