Does oil price respond to macroeconomic uncertainty? New evidence

Using a new measure of economic policy-related uncertainty (EPU), this study evaluates whether macroeconomic uncertainty affects oil price or vice versa. Specifically, we investigate mean and volatility spillovers between the EPU index and oil returns and the underlying drivers for the time-varying correlation. Our results illustrate the importance of policy uncertainty. Although the mean spillover of EPU on oil returns is negligible in the long run, the mean spillover in the short term and the volatility spillover of EPU are significant for oil spot and futures returns. Moreover, we provide evidence that both oil supply shocks and real economic shocks lead the correlation between the EPU and oil returns to fluctuate over time.