Investigating the Dynamic Interconnections between Global Economic Policy Uncertainty, Geopolitical Crises, and Financial Markets

Abstract

This study investigates the dynamic volatility connections among commodities, equities, and cryptocurrency markets in response to heightened Geopolitical Risk (GPR) and Global Economic Policy Uncertainty (GEPU). To investigate dynamic volatility connectedness, the study employs Time-Varying Parameter Vector Autoregression (TVP-VAR) framework and a Dynamic Conditional Correlation-Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) model. The sample period spans over ten years from January 2014 to June 2024. The findings reveal that volatility spillovers are predominantly driven by crude oil and U.S. stock markets, particularly during crises episodes. The results reveal that GPR and GEPU indices have a limited role as shock transmitters, and are relatively weakly associated with gold and cryptocurrency markets. During periods of financial distress, gold and cryptocurrency markets predominantly emerged as shock absorbers rather than transmitters, suggesting a limited shock-propagation role and highlighting their potential diversification benefits. Furthermore, in comparison to the geopolitical crises’ episodes, volatility transmission was most pronounced during the COVID-19 pandemic. These insights offer valuable implications for investors, academicians and policymakers, emphasizing the necessity of robust risk management strategies in times of economic and geopolitical uncertainty.