Resources Policy 73 (2021) 102210

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Resources Policy
journal homepage: www.elsevier.com/locate/resourpol

(A)symmetric time-varying effects of uncertainty fluctuations on oil price

volatility: A nonlinear ARDL investigation
Khalid M. Kisswani
Department of Economics and Finance, Gulf University for Science and Technology, P.O. Box 7207, Hawally, 32093, Kuwait

A R T I C L E I N F O A B S T R A C T

Keywords: Limited number of literature studies looked at the link between uncertainty and oil price volatility. However, the
Uncertainty asymmetric relationship regarding this nexus remains relatively unexplored area in the literature. In this paper,
Oil price we adopt asymmetric analysis for the uncertainty-oil price nexus, via employing the nonlinear autoregressive
Asymmetric
distributed lag model (NARDL) of Shin et al. (2014). We utilize three uncertainty indices; economic policy
Cointegration
NARDL
uncertainty, global geopolitical risk, and world uncertainty. The paper finds evidence of long-run relationship
(cointegration), using monthly data from 1990 to 2020. The NARDL findings show long-run asymmetric effect of
economic policy uncertainty and global geopolitical risk on WTI oil prices, however, asymmetric short-run effect
was documented for global geopolitical risk only. The empirical inferences highlight that economic policy un­
certainty and global geopolitical risk are more suitable and proper indices for analyzing the impact of uncertainty
on oil price volatility.

1. Introduction
The noteworthy masterwork of Hamilton (1983), followed by Mork
(1989), Burbidge and Harrison (1984), Hamilton (1996), and Hooker
(1999) among others, show that oil price shocks triggered the recession
during the 1970s and 80s. The main idea was that higher oil prices
reduced output. Furthermore, Jaffe and Elass (2015) point out that up to
50% of the regional conflicts and wars amongst 1973 and 2012 are
attributable to oil as a strategic commodity. Even though there is
numerous research on the macroeconomic impacts of oil price shocks,
yet the literature is relatively scarce on the effect of uncertainty on the
variability of oil prices coupled with mixed findings, and in view of that
this nexus requires further deliberation. The work of Jo (2014) implies
that uncertainty concerning oil price fluctuations causes irregularity and
instability in the economies around the world. Alao and Payaslioglu
(2021) show oil price volatility causes substantial effect on industrial
production volatility. As such, it is vital to understand the contributing
factors to oil price volatility, since such volatility adversely affects
economic activities (Jo, 2014). Hence, in this paper, we pay attention to
the effect of uncertainty on oil price volatility, in view of the fact that
studying the effects of uncertainty on the variations and disparities of oil
prices will provide a better sound evaluation and distinct prediction of
the oil prices, which is of great importance to the policy makers and
partakers in the oil market.
It is well known that WTI oil price volatility evolved over time,
especially around the 2008 financial crisis, which was accompanied by
the failure of the banking system of Iceland that lead to the European
sovereign debt crisis (Robays, 2016). WTI Oil prices went through rapid
upsurges and plunges previous to and following the financial crisis of
2008, and from 2014, the prices faced a trend of low values. Interest­
ingly enough, the literature continued to be somewhat silent on the ef­
fects of uncertainty on WTI oil price volatility. Albeit of the limited body
of literature on the impacts of uncertainty on oil market, the literature
didn’t arrive at a consensus. For instance, Robays (2016), and, Bakas and
Triantafyllou (2018) show uncertainty has increasing effect on oil price
volatility. Joets et al. (2017) find no connection between uncertainty
occurrences and oil price volatility. Mei et al. (2019), in testing the ef­
fects of two uncertainty indicators (economic policy uncertainty and
monetary policy uncertainty) on oil price volatility, show that both in­
dicators contribute positively to oil price fluctuations, and both in­
dicators can help in forecasting volatility of oil prices. Lyu et al. (2021)
tested the effect of global economic policy uncertainty on the volatility
of oil prices. They find, this type of uncertainty increases the volatility
significantly. Cunado et al. (2020) show that higher geopolitical risks
boost oil prices. Su et al. (2020) conclude that the volatility of oil prices
is significantly affected by the US economic policy. The findings of Aloui
et al. (2016) indicate that economic policy uncertainty raises oil price
returns only in a certain periods of time. Balcilar and Ozdemir (2019)

E-mail address: kisswani.k@gust.edu.kw.

https://doi.org/10.1016/j.resourpol.2021.102210
Received 20 February 2021; Received in revised form 21 March 2021; Accepted 22 June 2021
Available online 26 June 2021
0301-4207/© 2021 Elsevier Ltd. All rights reserved.
K.M. Kisswani
show that during periods of unanticipated events (e.g. 1990 Gulf War,
1997 Asian Financial crisis, 2008 Financial crisis), oil price return
volatility has limited negative impact on oil price, keeping in mind that
oil price volatility may feed back into the prices. Kang and Ratti (2013)
find that shocks of oil prices are connected to significant change in
economic policy uncertainty. The work of Lee et al. (2017) provide
evidence that economic and political risks initiate significant influences
on supply side shocks for oil-exporting countries. Chen et al. (2016)
reveal that political risks of OPEC countries affect Brent oil prices
positively. Similarly, Noguera-Santaella (2016) find that oil prices
before the year 2000 were affected positively by different geopolitical
events, however this effect diminished afterward.
Clearly, the efforts to demonstrate the uncertainty-oil price volatility
nexus have generally yielded mixed outcomes. Consequently, the nexus
is yet to be explored more. Furthermore, the greater part of studies that
examined the uncertainty-oil price nexus didn’t take into account the
possibility that WTI oil prices might react atypically (asymmetrically) to
positive uncertainty changes (innovations) than to negative changes
(innovations).
Against this backdrop, in this study, we examine if uncertainty
shapes oil price volatility. However, this paper focuses on investigating
the non-linear (asymmetric) linkage amongst uncertainty and West
Texas Intermediate (WTI, hereafter) oil price volatility. To the best of
our knowledge, this is the first attempt to empirically analyze the
asymmetric effects of uncertainty on WTI oil price volatility, since the
asymmetric uncertainty-oil price nexus remains unexplored area in the
current literature. Additionally, despite the fact that uncertainty is often
represented by several indices, in this paper we utilize three represen­
tative indices; namely economic policy uncertainty (EPU) of Baker et al.
(2016), geopolitical risk index developed by Caldara and Iacoviello
(2018), and world uncertainty index proposed by Ahir et al. (2019). As
such, this paper contributes to the existing literature on the
uncertainty-oil price nexus in two significant ways. First, we employ
non-linear analysis through enabling asymmetric time-varying impact of
uncertainty on oil price, whereas previous studies focused on linear
analysis. Second, we adopt three vital uncertainty indicators, while
previous studies utilized mainly the EPU index.
In light of the objective of our paper, our research question focuses
on examining the non-linear nexus between uncertainty indicators and
volatility of WTI oil prices. This is conducted via employing the
nonlinear autoregressive distributed lag (NARDL) model introduced by
Shin et al. (2014). NARDL methodology became notable for out­
performing all other conventional cointegration practices (Shin et al.,
2014). The NARDL model simply tests if the positive change in the un­
certainty measure has the same effect as the negative change, being that
NARDL methodology allows for decomposing the uncertainty measure
into positive and negative changes (innovations). Moreover, the struc­
ture of the NARDL model helps to detect the asymmetric effects in both
long- and short- run associations. A number of imperative findings are
recognized in this paper. First, the NARDL findings show long-run
asymmetric effect of economic policy uncertainty and global geopolit­
ical risk on WTI oil prices, however, asymmetric short-run effect was
documented for global geopolitical risk only. Second, empirical in­
ferences underscore that economic policy uncertainty and global
geopolitical risk are more suitable and proper indices for analyzing the
impact of uncertainty on oil price volatility.
The remainder of the paper is designed as follows. Section 2 illus­
trates the data set and the empirical framework. Section 3 offers the
empirical findings and inferences. Section 4 concludes.
2. Data and econometric methodology
2.1. Data description
All data used in this paper are monthly, from 1990:1 to 2020:9,
transformed in natural logarithm form. The sample data come from
2
Resources Policy 73 (2021) 102210
different sources. The nominal prices of WTI, quoted in US$; and US
consumer price index (CPI); with base year being 2010, were obtained
from the International Financial Statistics (IFS). Nominal WTI oil prices
are deflated by the US consumer price index to get the real values. The
US economic policy uncertainty (EPU) is obtained from Baker et al.
(2016). In general, the EPU index is based on search results from major
newspapers, which depicts a broad array of policy uncertainty expres­
sions shown in the newspapers. The global geopolitical risk index (GPR)
is obtained from Caldara and Iacoviello (2018).1 The geopolitical risk
index includes conflicts, political instability, and terrorism incidents.
Finally, the world uncertainty index (WUI) is obtained from Ahir et al.,
(2019). WUI proxies the global uncertainty level measure by including
the uncertainty measures from 143 countries. WUI utilizes the country
reports of Economist Intelligence Unit to measure uncertainty related to
trade for each of 143 countries, on a quarterly basis.2
It is known that uncertainty could start out from various causes and
elements such as shift or reformation of political regime or system,
terrorist act in a particular country, changes in government policies of a
given country that regulate foreign direct investment, etc. As such, it is
hard to find a one index that can cover all these unprecedented events
and episodes. Fortunately, Policy Uncertainty Group developed and
hosted different uncertainty measures on its website.3 As a result, in this
paper we adopt three major uncertainty indices (EPU, GPR, WUI) to
enable the analysis to capture all possible actions and events that might
contribute to oil price volatility. The decision to adopt these three un­
certainty indices as control variables comes from the fact that Baker
et al. (2016) find that EPU index is connected with volatility of stock
prices, and correlated with the lower levels of investments and
employment in many important industries. Furthermore, policy makers
and investors consider geopolitical risks as fundamental elements of
stock market dynamics and investment choices (Caldara and Iacoviello,
2018). Additionally, according to Ahir et al. (2018), the WUI index
follows a standardized process and structure which helps to lessen
worries about the accuracy, ideological bias and consistency.
We plot in Fig. 1 the progress of all engaged variables over time.
Fig. 1 shows the peaks and troughs of each variable throughout 1990:1
to 2020:9. The chosen time period captures a number of unexpected
events and episodes; e.g. Asian financial crisis in 1997, September 11
attacks in 2001, financial crisis in the years 2007 and 2008. As observed
from Fig. 1, the variables demonstrate whether uncommon peaks or
troughs in the course of the unexpected events. What’s more, Table 1
reports the descriptive statistics of the engaged variables.
2.2. Methodology
Let P denote WTI oil prices, EPU denote US economic policy uncer­
tainty index, GPR denote global geopolitical risk index, and WUI denote
world uncertainty index. The dynamic long-run specification of the
uncertainty-oil price nexus can be signified as:
Pt = α0 + α1 EPUt + α2 GPRt + α3 WUIt + εt (1)
where εt is the error term. Variables are in logarithms. In Eq. (1): α1 , α2 ,
α3 designate the long-run effect of uncertainty indices on WTI oil price
volatility. Pesaran et al. (2001) developed the autoregressive distributed
lags model (ARDL) that can estimate Eq. (1) through an error correction
model (ECM). The ECM representation of Eq. (1) is designed as:
1
For the details of the global GPR index, see: https://www2.bc.edu/matteo
-iacoviello/gpr.htm.
2
We transform the quarterly WUI values into monthly frequencies by
employing the quadratic match-sum method. This was done to coincide with
the monthly frequencies of the other variables.
3
See: https://www.policyuncertainty.com.
K.M. Kisswani Resources Policy 73 (2021) 102210

Fig. 1. Plot of WTI oil prices and uncertainty measures.

GPRt− 1 , and WUIt− 1 , such that the null hypothesis states: θ1 = θ2 = θ3 =

Table 1
θ4 = 0, and the alternative hypothesis states: θ1 ∕ = θ2 ∕= θ3 ∕ = θ4 ∕= 0.
Descriptive statistics.
Pesaran et al. (2001) produced new critical values for the cointegration
WTI EPU GPR WUI test (upper and lower bounds; I(1), I(0)).5
Mean 1.651 2.047 1.862 3.710 The description of Eq. (1) and ECM shows that uncertainty indices
Median 1.625 2.029 1.817 3.687 hold symmetric influence on WTI oil price volatility (response variable).
Maximum 2.125 2.702 2.737 4.294
The symmetric influence suggests if uncertainty index increases by A%
Minimum 1.155 1.651 1.376 3.166
Std. Dev. 0.209 0.172 0.260 0.213
and WTI oil price increases (decreases) by B%, then the A% decrease
Skewness 0.182 0.630 0.576 0.192 affects WTI oil price by the same B% in the same (opposing) direction. As
Kurtosis 2.099 3.685 2.984 2.697 such, symmetry suggests that the positive and negative changes (shocks)
Jarque-Bera 14.518 31.633 20.422 3.691 of uncertainty index will cause analogous absolute impact on WTI oil
Probability 0.0007 0.0000 0.0000 0.1580
price. However, numerous economic variables do not adhere to such
Sum 609.106 755.330 687.012 1369.023
Sum Sq. Dev. 16.142 10.859 24.909 16.642 symmetric association (see for example: Neftçi, 1984; Falk, 1986; Kiss­
Observations 369 369 369 369 wani, 2017; Kisswani et al., 2019; Kisswani and Kisswani, 2019; Kiss­
wani, 2019a; Kisswani, 2019b; Kisswani et al., 2020). This means that
the increase in uncertainty index (positive shock) might not have the
q
∑ q
∑ q
∑ q
∑
ΔPt = μ0 + δ1i ΔPt− i + δ2i ΔEPUt− i + δ3i ΔGPRt− i + δ4i ΔWUIt− equivalent magnitude or direction effect like the decrease in uncertainty
i
i=1 i=0 i=0 i=0 index (negative shock), or even one of the increase or the decrease
+ θ1 Pt− 1 + θ2 EPUt− 1 + θ3 GPRt− 1 + θ4 WUIt− 1 + vt shocks might not be significant. This is known as asymmetric effect
(non-linear impact).
(2)
Within these lines, this paper pays attention to the possible asym­
Pesaran et al. (2001) show that Eq. (2) can be estimated using the metric impact of uncertainty indices on WTI oil price volatility. We do so
conventional OLS method. Eq. (2) captures the long- and short-run ef­ by utilizing the non-linear ARDL model (NARDL) of Shin et al. (2014).
fects of uncertainty indices on WTI oil prices. Inferences about the This methodology allows for testing the asymmetry of the nexus by
long-run effect are described by the estimates of θ2 , θ3 , and θ4 normal­ introducing the positive and negative shocks of the uncertainty indices
ized on θ1 ; − θθ21 , − θθ31 , − θθ41 .4 By the same token, the short-run impacts of (independent variables). Shin et al. (2014) show that a variable can be
∑q q
∑ decomposed to positive and negative shocks through the partial sums.
uncertainty indices on WTI oil prices are depicted by δ2i , δ3i , and For example, from economic policy uncertainty index (EPUt ) we can
i=0 i=0
q
∑ generate the positive shock (EPUt+ ) and the negative shock (EPUt− ) as:
δ4i . Pesaran et al. (2001) show that establishing cointegration
i=0 ∑
t ∑
t
(long-run) is necessary first before testing the significance of the long- EPUt+ = ΔEPUi+ = max(ΔEPUi , 0) (3)
and short-run effects. Cointegration is tested in Eq. 2, through a typical i=1 i=1

F-test for the joint significance of the lagged level variables; Pt− 1 , EPUt− 1 ,

5
Pesaran et al. (2001) show that evidence of cointegration is established if
4
i.e.: − θ2
θ1 = α1 ; − θ3
θ1 = α2 ; − θ4
θ1 =.α3 F-statistic is greater than the critical values of the upper bound (I(1)).

3
K.M. Kisswani Resources Policy 73 (2021) 102210

and involves estimating a vector autoregressive (VAR) model in levels that

supplements the right order of the VAR, k, by the maximum order of
∑
t ∑
t
integration, dmax, and necessitates that the typical test statistics for
EPUt− = ΔEPUi− = min(ΔEPUi , 0) (4)
i=1 i=1
Granger causality have the standard asymptotic distribution. The T-Y
methodology involves estimating a (k + dmax) order of VAR, and dis­
Using the same reasoning, the geopolitical risk index (GPRt ) is dis­ regarding the coefficients of the last lagged dmax vector (see Zapata and
integrated into GPR+ t and GPRt , as well as world uncertainty index
−
Rambaldi, 1997; Wolde-Rufael, 2005; Kisswani, 2019a; Kisswani,
(WUIt ) that is disintegrated into WUIt+ and WUIt− . 2019b; Kisswani and Kisswani, 2019; Kisswani et al., 2019; and Kiss­
The symmetric long-run specification of Eq. (1) now develop into wani, 2017).
asymmetric association as: Specifically, the common Toda and Yamamoto causality test
Pt = β0 + β1 EPUt+ + β2 EPUt− + β3 GPR+ − + − amongst two variables (Yt and Xt ) can be conducted via assessing the
t + β4 GPRt + β5 WUIt + β6 WUIt
subsequent VAR model:
+ εt
(5) ∑ ∑ ∑ ∑
m k m k
Yt = γ + δ1i Yt− i + δ2i Yt− i + θ1i Xt− i + θ2i Xt− i + ε1t (7)
Then, in line with Pesaran et al. (2001) and Shin et al. (2014), the i=1 i=m+1 i=1 i=m+1

ECM setup turns out to be:

∑
m ∑
k ∑
m ∑
k

∑
m ∑
n ∑
o Xt = τ + ϑ1i Xt− i + ϑ2i Xt− i + η1i Yt− i + η2i Yt− i + ε2t (8)
ΔPt = η0 + φ1i ΔPt− i + φ2i ΔEPUt−+ i + φ3i ΔEPUt−− i i=1 i=m+1 i=1 i=m+1
i=1 i=0 i=0
∑
n ∑
o ∑
n ∑
o From (7), Granger causality from Xt to Yt involves θ1i ∕
= 0, ∀i ; and
+ φ4i ΔGPR+
t− i + φ5i ΔGPR−t− i + φ6i ΔWUIt−+ i + φ7i ΔWUIt−− i
similarly from (8), Yt Granger causes Xt if η1i ∕
= 0, ∀i .
i=0 i=0 i=0 i=0

+ λ1 Pt− 1 + λ2 EPUt−+ i + λ3 EPUt−− i + λ4 GPR+ − +

t− i + λ5 GPRt− i + λ6 WUIt− i 3. Results and discussion
+ λ7 WUIt−− i + ϱt
(6) 3.1. I(2) stationarity test

The outline of the ECM of Eq. (6) enables to depict the asymmetry in
the uncertainty-oil price nexus in both the long- and short-run. This
property of the NARDL modelling is the major advantage over other
conventional time series techniques. Shin et al. (2014) enlighten that the
analytical methodology of Pesaran et al. (2001) in estimating Eq. (2),
plus employing the F-test to examine cointegration, are still valid to be
used and applied for Eq. (6). As such, in Eq. (6), the estimates of λ2 till λ7
normalized on λ1 will capture the asymmetric long-run impacts on WTI
n
∑ ∑o
oil price volatility. Likewise, φ2i till φ7i depict asymmetric
i=0 i=0
short-run impacts. To verify the asymmetric long-run effect of EPU on
WTI oil price, we need − λλ21 to be significantly different from − λλ31 .
Similarly, asymmetric long-run effect of GPR needs −
cantly different from − λ5
, and asymmetric long-run effect of WUI needs
λ1
Pesaran et al. (2001) and Shin et al. (2014) show that ARDL and
NARDL models prevail over other cointegration tests, because both
models allow engaged variables to have different order of integration
(order one and/or order zero), which allowed both model to avoid
limitations of other cointegration tests. However, ARDL and NARDL
models will produce unsound results once any engaged variable is of
second order of integration. Because of that, we test if any of the engaged
variables is of second order of integration, ahead of moving forward
with the ARDL and NARDL analysis.
So as to achieve sound outcomes, we test the stationarity of the first
difference for each variable by applying the Zivot and Andrews test
(1992) (hereafter Z-A), which is generally viewed as appropriate test for
λ4
λ1
to be signifi­ the order of integration.7 If the first difference is stationary, then the
variable is not I(2). Z-A unit root test employs a null hypothesis that the
series has a unit root (is non-stationary), in contrast to an alternative

− λ6
to be significantly different from − λ7
. Significance test is conducted
λ1 λ1 that the series has no unit root (is stationary). In addition, Z-A test
by Wald-test, once both changes; positive and negative, are significant. constructs a unit root test that includes an endogenous structural break.
∑n
Additionally, the significant asymmetric short-run effects need φ2i to The findings of Z-A unit root test are given in Table 2. The findings,
i=0 undoubtedly, show that the first differences for all variables are sta­
o
∑ n
∑ o
∑
be different than φ3i for EPU, φ4i to be different than φ5i for GPR, tionary at the conventional 5% level or lower, implying that none of the
i=0 i=0 i=0 variables is integrated of order 2. Hence, this allows us to proceed with
n
∑ ∑o
and φ6i to be different than φ7i for WUI. As well, significance is
i=0 i=0
Table 2
conducted using Wald-test, once both positive and negative changes are Z-A unit root test (1st difference).
significant. For Eq. (6), as cointegration is supposed first to be estab­
Variable t-statistic Lags Break Point
lished, the F-test is applied for λ1 = λ2 = λ3 = λ4 = λ5 = λ6 = λ7 = 0,
against λ1 ∕
= λ2 ∕= λ3 ∕= λ4 ∕
= λ5 ∕= λ6 ∕
= λ7 ∕= 0. WTI − 11.23*** 3 1999M01
EPU 13.86*** 3 2013M02
The analysis concludes by examining the causality direction between −
GPR − 12.40*** 4 2003M04
the WTI oil price (Pt ) and all positive and negative changes of the three WUI − 12.84*** 1 1998M12
uncertainty indices; EPUt+ , EPUt− , GPR+t , GPRt , WUIt and WUIt . This is
− + −
Notes: WTI: West Texas Intermediate, EPU: US economic policy uncertainty
done by utilizing the modified approach of Granger causality test of
index, GPR: global geopolitical risk index, and WUI: world uncertainty index.
Toda and Yamamoto (1995).6 Toda and Yamamoto causality test uses a
Null Hypothesis: unit root. Maximum lags = 4. Critical values: -5.57, -5.08,
lag augmented VAR testing procedure that is robust to the stationarity -4.82 at the 1%, 5%, and 10% levels respectively *** denotes significance at the
and cointegration of the data, and disregards the probable pre-test bias 1% level.
making the test more applicable than other standard causality tests
(Zapata and Rambaldi, 1997). The Toda and Yamamoto test (T-Y)

6 7
To get further information about this test, consult Toda and Yamamoto To maintain space, we didn’t discuss at this point the specifics of the Z-A
(1995). unit root test. For more information, see Zivot and Andrews (1992).

4
K.M. Kisswani Resources Policy 73 (2021) 102210

the aforementioned analysis. Table 4

ARDL F-bounds test (Null Hypothesis: No cointegration).
3.2. linear ARDL findings Test Statistic Value Significance level I(0) I(1)

F-statistic 10.23*** 10% 2.37 3.2

The analysis of the uncertainty-oil price volatility nexus starts with K 3 5% 2.79 3.67
applying the linear ARDL model as a baseline model. This is conducted 1% 3.65 4.66
by estimating Eq. (2), and discussing the findings of the symmetric long- Long-run coefficients
run effects of the uncertainty indices. Nevertheless, prior to do so, pri­ Variable Coefficient Std. Error t-Statistic Prob.

marily we need to explore if the data involves any shocks or unexpected
events which is known as structural breaks. When analysis ignores the
occurrence of structural breaks, the cointegration results might be
misleading, since the breaks might cause unstable cointegration rela­
tionship (Gregory et al., 1996). For this reason, we apply the Bai and
Perron (1998) test, which allows for detecting up to five breaks and
diagnosing its dates. The test exercises a trimming of 15%, with 5%
significance level for the sequential testing.8 When dates of structural
breaks are verified, the ARDL and NARDL models allow to incorporate,
within the error correction model, dummy variables as proxies for such
breaks. The dummy variable takes value one starting from the break
date and afterward, and a value of zero before the break date. Pesaran
et al. (2001) unveil that incorporating structural breaks would not affect
the inferences drawn vis-à-vis the cointegration relationship. Table 3
suggests five structural breaks for WTI oil prices. Structural breaks are
found around: 1994M08, 1999M09, 2004M08, 2010M03, 2014M12.
Now, we estimate Eq. (2) by comprising the dummy variables, to
proceed with the linear ARDL analysis as illustrated aforesaid. The
estimation permitted up to four lags on first differenced variable and
utilized the Akaike Information Criterion (AIC) for deciding on the
optimal lags. Table 4 presents the F-statistic bounds test for cointegra­
tion, plus the long-run effects of uncertainty indices on WTI oil prices.
The F-statistic is larger than the upper bound critical values at the 1%
level, confirming that variables are cointegrated. As a result of cointe­
gration affirmation, next we pay attention to the long-run effects of
uncertainty indices. Table 4 suggests significant negative impact of EPU
on WTI oil prices. This suggests when EPU increases by 1%, WTI oil
prices decreases by 0.23%, whereas if EPU decreases by 1%, WTI oil
prices increases by 0.23%. This effect denotes that EPU increase and
decrease are triggering matching long-run size effect on WTI oil prices
(negative symmetric effect). However, this might not be the case as
described formerly, where EPU increase might not have the identical
effect as EPU decrease. Table 4, as well, suggests no significant long-run
effect of GPR and WUI indices on WTI oil prices, since the estimated
coefficients are insignificant. Furthermore, Table 4 reports the error-
correction coefficient (ECMt− 1 ) which is used as an affirmation of the
cointegration relationship. ECMt− 1 is required to be significantly nega­
tive with absolute value less than one, which is the case in Table 4.
EPU − 0.233** 0.100 − 2.33 0.0211
GPR − 0.021 0.071 − 0.296 0.7714
WUI 0.015 0.094 0.160 0.8726
C 1.950*** 0.317 6.151 0.0000
ECMt− 1 − 0.158*** 0.022 − 7.182 0.0000
Notes: The bounds test critical values are from Pesaran et al. (2001), Critical
values: Case II- restricted intercept and no trend. ECMt− 1 is the error-correction
coefficient. ***, ** denote significance at the 1% and 5% levels, respectively.
3.3. Non-linear (asymmetric) ARDL model (NARDL)
At this point, we proceed to estimate the NARDL model to examine
the asymmetric effects of uncertainty indices on WTI oil prices. Ac­
cording to the specifications detailed beforehand, we first examine
cointegration amongst the variables, then estimate the long- and short-
run coefficients, once evidence of cointegration is found. Table 5 pre­
sents the findings of the NARDL estimation.
The reported findings show evidence that engaged variables are
cointegrated, as needed, given that the F-statistic is significant at the
conventional 5% level or lower. Table 5 illustrates the long-run effects of
uncertainty indices, positive and negative changes. For EPUt , the long-
run negative shock (EPU−t ) is negative and significant, while the posi­
tive shock (EPUt+ ) is not significant. This means WTI oil price (Pt ) is
affected by the increase in economic policy uncertainty index but not by
economic policy uncertainty index decrease, suggesting economic policy
uncertainty index; EPUt , influences WTI oil price asymmetrically in the
long-run. This means we can reject the symmetric effect assumption of
the linear ARDL model, as the linear ARDL model shows economic
policy uncertainty index increase and decrease both significantly affect
WTI oil price. As for geopolitical risk index (GPRt ), the long-run negative
shock (GPR−t ) is positive and significant, but the positive shock (GPR+t ) is
not. This means WTI oil price (Pt ) is affected asymmetrically, in the long-
run, by geopolitical risk index (GPRt ). However, the linear ARDL model
suggested geopolitical risk index (GPRt ) does not affect WTI oil price
(Pt ). Finally, Table 5 shows that world uncertainty index (WUIt ) does not
have asymmetric effect, since both long-run positive and negative
shocks (WUIt+ , WUIt+ ) are insignificant. To sum up, Table 5 presents

Table 5
NARDL F-bounds test (Null Hypothesis: No cointegration).
Test Statistic Value Significance level I(0) I(1)

F-statistic 7.03*** 10% 1.99 2.94

Table 3 K 6 5% 2.27 3.28
Bai and Perron (1998) Structural breaks test. 1% 2.88 3.99
Long-run coefficients
Break Test Scaled F-statistic Critical Value a Break Date
Variable Coefficient Std. Error t-Statistic Prob.
0 vs. 1 * 568.503 8.58 1994: M08, 1999: M09
EPU+
t − 0.140 0.087 − 1.609 0.1095
1 vs. 2 * 249.448 10.13 2004: M08, 2010: M03
2 vs. 3 * 53.147 11.14 2014M12 EPU−t − 0.194* 0.100 − 1.940 0.0531
3 vs. 4 * 48.770 11.83 GPR+
t 0.033 0.071 0.465 0.6464
4 vs. 5 * 40.233 12.25 GPR−t 0.189** 0.080 2.363 0.0183
Notes: a (Bai and Perron, 2003) critical values. * denotes significance at the 5% WUIt+ 0.074 0.096 0.771 0.4410
level. WUIt− − 0.167 0.116 − 1.440 0.1504
C 1.546*** 0.056 27.607 0.0000
ECMt− 1 − 0.183*** 0.024 − 7.63 0.0000

Notes: The bounds test critical values are from Pesaran et al. (2001), Critical
values: Case II- restricted intercept and no trend. ECMt− 1 is the error-correction
8
For more details, see Bai and Perron (1998). coefficient. ***, ** denote significance at the 1% and 5% levels, respectively.

5
K.M. Kisswani Resources Policy 73 (2021) 102210

evidence of long-run asymmetric effect for economic policy uncertainty

index (EPUt ) and geopolitical risk index (GPRt ).
We next investigate the short-run asymmetry. Table 6 gives the
short-run findings. The short-run effects of the positive and negative
shocks will be significant, when at least one lag of the first-differenced
for each shock is found to be significant. As such, the short-run effects
of the positive shock of the geopolitical risk index (GPR+ t ) are significant,
as two lags of the first-differenced are significant. However, the short-
run effect of the negative shock (GPR−t ) is not significant, as the first-
differenced lag is not significant. Hence, Table 6 reveals asymmetric
short-run effects of geopolitical risk index. On the other hand, Table 6
donates no asymmetric short-run effects of world uncertainty index
(WUIt ) nor of economic policy uncertainty index (EPUt ), since for each
index both shocks (positive and negative) are not significant. On the
whole, Table 6 shows asymmetric short-run effects of only geopolitical
risk index (GPRt ) on WTI oil price (Pt ).
The reliability of the inferences and findings from the NARDL esti­
mations rest on the degree that these estimations are statistically sound.
Accordingly, we run several diagnostic tests that examine the stability
and robustness of the NARDL model. Table 6 reports the Lagrange
Multiplier (LM) statistic of Breusch-Godfrey serial-correlation test, the
model specification test of Ramsey RESET, and adjusted-R.2 The two
tests are used as major post assessments for the residuals. For the
Breusch-Godfrey test, where no serial correlation is the null hypothesis,
the χ 2 statistic shows we fail to reject the null hypothesis, indicating that
the residuals are not suffering of serial correlation. For the Ramsey
RESET test, which has a null that the model is well specified, the statistic
from Table 6 shows that we reject the null, indicating the model does
suffer misspecification. In addition, Table 6 reports high adjusted-R2 ,
suggesting notable level of goodness of fit of the model. What’s more,
the diagnostic tests include evaluating the parameter stability. This is
done through the cumulative sum of recursive residuals (CUSUM) and
the cumulative sum of squares of recursive residuals (CUSUMSQ) tests of
Fig. 2. Plot of CUSUM and CUSUMSQ tests.
Brown et al. (1975). Fig. 2 presents the CUSUM and CUSUMSQ graphs
(by means of 5% critical lines). The graphs display parameter stability
over the sample period, where the CUSUM is stable while the CUSUMSQ uncertainty indices at WTI oil prices, we proceed with the causality test
is marginally stable within the 5% significant critical lines. Kisswani of Toda and Yamamoto (1995) that enables performing long-run
(2019b) highlights that once one of the two tests (CUSUM and Granger causality, as described formerly. Table 7 recaps the outcomes
CUSUMSQ) shows evidence of stability, thus this is a confirmation of of long run T-Y causality test. As can be understood from the modified
parameter stability in general. Wald statistic (χ 2 ), there is unidirectional causality running from posi­
tive change in economic policy uncertainty index (EPU+ ) and positive
change in geopolitical risk index (GPR+ ) to WTI oil price (Pt ), as the
3.4. Toda and Yamamoto causality test
modified Wald statistic (χ 2 ) is significant at the 5% level or lower,
To enhance the preceding investigation of the asymmetric effect of implying we reject the null hypotheses of no Granger causality. On the
other hand, Table 7 shows unidirectional causality running from WTI oil
price (Pt ) to negative change in geopolitical risk index (GPR− ), and to
Table 6
NARDL short-run coefficients.
Variable Coefficient Std. Error t-Statistic Prob. Table 7
ΔEPU+ − 0.033 0.032 − 1.031 0.3055 Toda and Yamamoto non-causality test.
t
ΔEPU−t − 0.013 0.039 − 0.333 0.7340 χ2 Prob. Lags
ΔGPR+
t 0.007 0.021 0.333 0.7371 EPU+⇏ P 7.931** 0.048 3
t (-1)
ΔGPR+ − 0.034 0.024 − 1.417 0.1648 P ⇏ EPU+ 1.244 0.742 3
− 0.056** 0.022 − 2.545 0.0105 EPU-⇏ P 2.373 0.499 3
t (-2)
ΔGPR+
P ⇏ EPU- 6.111 0.1063 3
t (-3)
ΔGPR+ − 0.038* 0.021 − 1.810 0.0689
GPR+⇏ P 13.246*** 0.010 4
ΔGPR−t 0.026 0.029 0.897 0.3693 P ⇏ GPR+ 5.649 0.227 4
ΔWUIt+ 0.013 0.047 0.277 0.7757 GPR-⇏ P 2.70 0.610 4
ΔWUIt− − 0.054 0.051 − 1.059 0.2925 P ⇏ GPR- 9.518** 0.049 4
Diagnostic Measures
WUI+⇏ P 8.035 0.531 9
χ2 0.945 (0.624)
P ⇏ WUI+ 14.704* 0.099 9
RESET Test 12.508 (0.001) WUI-⇏ P 8.468 0.488 9
Adjusted R2 0.968 P ⇏ WUI- 9.092 0.429 9

Notes: χ 2 is the LM statistic for autocorrelation up to order 2. RESET test is Note: χ2 is the modified Wald test of the augmented VAR. ⇏: does not Granger
Ramsey’s test (null hypothesis: functional form is correctly specified). Numbers cause. The number of lags denote VAR length (k + dmax). The VAR order (k) was
in parentheses represent p-value. ** and * denote significance at 5% and 10% selected by AIC. ***, **, and * denote significance at 1%, 5% and 10% levels,
levels, respectively. respectively.

6
K.M. Kisswani
positive change in world uncertainty index (WUI+ ), supported by the
significant modified Wald statistic (χ 2 ).
4. Concluding remarks and implications
This paper examined the long- and short-run asymmetric impacts of
uncertainty indices; namely US economic policy uncertainty index
(EPUt ), global geopolitical risk index (GPRt ), and world uncertainty
index (WUIt ) on WTI oil price, via the NARDL model. With monthly data
covering the period from 1990:1 to 2020:9, we started by examining the
symmetric linear ARDL model. The findings show significant long-run
effect of EPUt on WTI oil price only, where no long-run effect was
found in case of GPRt and WUIt . Our findings are in line with many
studies in the literature (see, inter alia, Robays, 2016; Bakas and Tri­
antafyllou, 2018; Mei et al., 2019; Lyu et al., 2021; Su et al., 2020; and
Aloui et al., 2016)
On the other hand, when examining the non-linear effects, the
NARDL findings show long-run asymmetric effect of economic policy
uncertainty and global geopolitical risk on WTI oil prices. In particular,
the empirical examination shows that the negative change (shock) of
economic policy uncertainty (EPU−t ) significantly affect WTI oil price
negatively, meanwhile the positive change of economic policy uncer­
tainty (EPU+ t ) does not have significant long-run effect on WTI oil price.
Likewise, the negative change (shock) of global geopolitical risk (GPR−t )
significantly affect WTI oil price negatively, meanwhile the positive
change of global geopolitical risk (GPR+ t ) does not have significant long-
run effect on WTI oil price. On the other hand, the NARDL the empirical
examination did not support any asymmetric long-run effect of world
uncertainty index (WUIt ) on WTI oil price. As for asymmetric short-run
effects, NARDL model gave support for only the global geopolitical risk
index (GPRt ).
The Toda and Yamamoto (1995) causality test suggests unidirec­
tional causality running from EPU+ and GPR+ to WTI oil price. Equally,
unidirectional causalities running from WTI oil price to GPR− , and to
WUI+ were suggested by Toda and Yamamoto causality test. On the
whole, our empirical inferences highlight that economic policy uncer­
tainty and global geopolitical risk are more suitable and proper indices
for analyzing the impact of uncertainty on oil price volatility.
The findings that only negative change (shock) of economic policy
uncertainty and global geopolitical risk affect WTI oil prices in the long-
run, have several noteworthy implications for policy makers and in­
vestors. First, economic policy uncertainty and global geopolitical risk
are important driving factor of oil price movements. This should
encourage policy makers and investors to monitor oil future markets
carefully. Second, policy makers, especially of oil exporter countries,
should consider the contribution of non-fundamental factors, such as
uncertainty, to oil price movements, where focusing only on the changes
and shocks in oil supply and demand could be misrepresentative. Third,
regarding investors, they need to be more careful when developing
strategies or assessments considering investing in crude oil in the course
of unclear or unstable period of time, since uncertainty is shown to
contribute to the oil price volatility. Finally, policy makers and investors
should keep in mind the heterogeneity in the effects of different un­
certainty indices on oil price volatility, since our findings show that not
all uncertainty indices do affect oil price volatility.
Credit author statement
Khalid M. Kisswani: Conceptualization, Methodology, Investiga­
tion, Validation, Writing- Reviewing and Editing
Funding
This research did not receive any specific grant from funding
agencies in the public, commercial, or not-for-profit sectors.
7
Resources Policy 73 (2021) 102210
Declaration of competing interest
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influence
the work reported in this paper.
Acknowledgements
The author would like to thank the Editor; Gary Campbell, and two
anonymous reviewers for their constructive comments and suggestions
on a previous draft of this work that helped improve the paper. Any
remaining errors are the responsibility of the author.
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