Economic policy uncertainty, jump dynamics, and oil price volatility

Although the underlying forces behind oil price volatility have attracted the attention of scholars, a clear consensus is yet to be achieved on how to quantify the contributions of economic policy uncertainty (EPU) and jump dynamics simultaneously. This paper develops a joint EGARCH-MIDAS-ARJI model to address this issue and break the obstacle of mixed data sampling. To avoid the effect of political and business cycles, all EPU indices are detrended using the Hodrick Prescott (HP) filter. The results show that oil price volatility is adversely associated with EPU. As large EPU values imply that policymakers are trying to make some beneficial efforts, this finding challenges the neoclassical opinion that policy intervention is a source of market fluctuation. We also find that the US policy intervention can reduce only less than 6% of oil price volatility, while the effects of China's economic policy are even weaker. More importantly, jump dynamics still account for a remarkable percentage in oil price volatility, especially during lower volatility periods. Possible explanations are that policy makers only respond to large persistent oil price volatility, while the targets and actions of oil-importing countries and oil-exporting countries are also converse in most cases.